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Can We Have a Recovery When People Have So Much Debt?
By JLP | June 11, 2009
I don’t know about you but I get nervous when I hear all the talk about hopes for a consumer-led recovery. Why? Because consumers are already maxed out:
By the end of 2008, households were on the hook for $13.8 trillion in debt — nearly matching the $14.3 trillion output of the entire U.S. economy, not adjusted for inflation, that year.
Households are shedding debt; they’re just not doing it very quickly. They owed roughly 130% of disposable income at the end of 2008, down only slightly from a record 133% in the first quarter of 2008.
An old saw about U.S. consumers is never to underestimate their willingness to spend beyond their means. The debt-to-income ratio first crossed 100% during the 2001 recession, when debt-fueled consumer spending helped spark a recovery. It kept rising post-recession as super-low interest rates encouraged still more borrowing. And it rose even after the Fed raised rates, as consumers piled into mortgages to chase rising home prices.
The recovery we experienced after the 2001 recession was built on sand (consumers taking on more debt than they could handle).
Is it just me or does it seem like the fundamentals of personal finance are being completely ignored? How can we realistically expect a recovery if the fundamentals are all wrong? It seems like we all want a recovery but nobody wants to make the hard choices and take the hard actions. Instead we act as if we can cover this up with bailouts and everything will be peachy.
Long-term I’m an optimist. Short-term I’m scratching my head.
Topics: Credit Crisis, Economics | 10 Comments »
June 11th, 2009 at 5:58 pm
JLP,
That's a valid argument. Our economy is very dependent on consumer spending and when they don't have money to spend things don't look too good. It's likely that the coming recovery is going to be gradual and long. It's going to be a while before the fundamentals are in sync again.
June 11th, 2009 at 7:14 pm
Sure. Debt doesn't appear overnight and won't disappear overnight either but that doesn't mean a recovery can't happen, only that it will be more anemic than usual and a good portion of debt will be defaulted away as well as paid down over time.
June 11th, 2009 at 8:10 pm
It makes sense that the "experts" want a consumer led recover because they want a recovery. As usually, it is wallstreet looking for fortune and glory at the expense of the average consumer.
June 11th, 2009 at 8:45 pm
When they say debt is 130% of disposable income on average, are they including mortgages, student loans, car loans, and debt for investment? (The kinds of things we would generally call "good debt"?) That can't possibly just be credit cards and consumer debt can it?
June 11th, 2009 at 11:53 pm
My personal opinion is that recessions are not bad. The next recovery should not begin until the stupidity has been cleansed and resources are reallocated to better utilized places.
I vote that (US) resources be reallocated to building wind generators and nuclear power plants and electric cars or we will be forever indebted to the oil producing nations.
And BTW, ethanol was a retarded idea — whichever economist that thought running our cars on our food should be "reallocated" to a place where he can do less damage.
June 12th, 2009 at 2:17 am
I long for cd rates of 6-8%. Perhaps then "old-fashioned" savings sense will catch fire. It's a lot more fun saving when you know you're going to double your money in 9-12 years vs. 36!
BTW, did you catch the MW headline about 30-yr mortgage rates increasing again? Time to redo your "change in monthly pmt" table…
http://www.marketwatch.com/story/mortgage-rates-t...
June 12th, 2009 at 2:22 am
To Steve – it doesn't matter if there is more good debt than bad debt when the total debt becomes unmanageable. Economies grow through savings and investment. Wealth is not created by debt because eventually the debt must be repaid whereas savings and investment leads to technological innovation and entrepreneurial creation.
If you look at the US since the mid-1990s, the growth in debt has corresponded almost exactly with the drop in savings. While we may see a short term cyclical recovery, the economy will struggle as we reduce our debt. The scary thing is there has never been a deleveraging in an economy that wasn't dramatic. A slow repayment of debt is probably out of the question if history repeats. We will probably see a liquidation of debt – meaning asset deflation.
Of course, the Fed may be able to engineer a different result. But, I think to what Einstein once said – never expect someone who caused a problem to fix it.
June 12th, 2009 at 3:35 pm
If I actually get out of $80K of debt, then anyone can do it! Just time, sacrifices, and patience. Oh ya, and wanting it to happen badly enough.
June 24th, 2009 at 5:47 pm
I don't see a recovery in the near horizon. But then this recession is just nature's way of letting us know we completely screwed up.
When consumers spend way beyond their capabilities and businesses make foolish loans/stupid investments, the pendulum eventually needs to swing all the way to the other side. So for a while consumers will be stingy and businesses will be cautious. This is probably a good thing in the long run.
September 6th, 2009 at 9:53 pm
I totally agree. Recovery seems impossible if if we do not pay our debt and bailouts will not solve the credit crunch in the long term.
Another point that we can contribute to the recovery of our economy is to spend more. Yes that is true.
Why? every time we tighten our belts to save more and spend less, we only make the credit crunch more intense. We forgot the most important fuel of our economy – consumption. Without it our economy will eventually collapsed. I am not saying we should spend all our money, but the point is, we should be responsible enough to establish a balance among paying our debt, saving money and spending.