Monday, June 15, 2015

Not Yet Half Full....

I saw this chart this morning in an article detailing our current unsustainable bubble economy, fueled by funny money printed by the Federal Reserve in an attempt to postpone what some term a Kondratieff winter. One way or another debt, particularly bad debt, must be squeezed out of the economy. How and when that happens remains to be seen. However, as I studied this graph, it occurred to me that while the glass is not yet half full, the water level is heading the right direction.

Credit card debt is getting better. After peaking in 2009, as a nation we are starting to pay down our credit cards. The numbers are still not good. Interestingly, credit card debt is a tale of two cities. The average U.S. household owes $7,327. However if only the households that carry a balance on their cards is considered, that number rises to $15,706. A fine example of why the average is sometimes a relatively useless number when considering financial statistics. $15,706 in credit card debt, most likely in the 12%-20% range is a crippling burden for a typical family. It is hard for me to understand how a family could allow this to happen, but I have heard too many stories of how the unemployed tried to maintain their standard of living by putting it all on plastic until they landed in bankruptcy court.

We are doing better with mortgages. My highly calibrated eyeball sees about a $1.5 Trillion drop in mortgage debt since the real estate bubble popped in 2006. As a nation we still owe over $9 Trillion on our homes. As a point of reference we owed just over $6 Trillion in 2003. Unfortunately, it is difficult to find hard numbers on the various sorts of zombie mortgages waiting out there in the darkness. Sometimes the borrower, knowing that foreclosure is in the cards, vacates their home with or without notifying the bank. The bank knows that it isn’t getting the mortgage check but doesn’t know why. In some cases the bank chooses not to maintain the property or pay the property taxes. This throws both the property and the mortgage holder into a state of limbo until formal bankruptcy proceedings are complete. More often the homeowner just stops making payments, but remains in the home until the sheriff knocks on the door. If the occupant is maintaining the property, it can be in the bank’s interest not to go for a quick kill in foreclosure proceedings. If the local market is extremely depressed, the bank may lose less money by letting the current occupant remain until housing prices recover a bit.

The really bad news is student debt. In 2009, the year I started writing this blog, student debt was only around $150 Billion. It was not yet an issue. In only six years that number has jumped to around $1.2 Trillion! What was once a minor irritant has exploded into a full blown national crisis. How in the world something that bad could happen so quickly, is a story of greed, naïveté, and the well intentioned folly of a Government that believes more money always makes everything better. It is particularly destructive to our economy because it postpones and limits the development of household formation units. Traditionally young families are one of the major drivers in the economy. Young people get married. Then they start a family. Then they have to buy houses, furniture, appliances, minivans, new clothes for their children (every year), school supplies, etc. etc. Well, they aren’t going to do much of that until they pay off those student loans. It also causes a lot of psychological problems. Young people believed a lie, that a college diploma is a golden ticket to the good life. In fact about 40% of the recent college graduates lucky enough to find a job will not be working at a job that requires a college diploma. Of course us Baby Boomers all know coworkers and friends who tell unhappy stories about their boomerang children sulking in their basements. It is a disaster.

People like me who write blogs like this one still have to convince our nation that debt is a curse not a blessing. However, as Bismarck observed, the foolish are learning from their mistakes and the wise are learning from the mistakes of others. Gradually, as a nation, it is beginning to dawn on our collective psyche that debt is a bad thing that constricts and limits our freedom. Hopefully, sometime in the future, we will rediscover that the ability to lend money to others is a blessing.

No comments:

Post a Comment