Jason: This article is a letter written by Thomas O'Connor and I have been given consent from him to publish it. The economic reality of America's debt burden and the time to bring it down to manageable levels is a huge wake up call and warning to the US citizenship.
"Dear *******
Paul Krugman says the world “avoided a second Great Depression.” He’s wrong too. I know he won the Nobel Prize for Economics in 2008. So What ?
The stock market crashed in ’29. The market then bounced. After a few months almost everyone was persuaded that the “worst was over.” But the worst was just beginning. It wasn’t until 1932 that the stock market finally hit bottom. By then, it was beginning to seem like a depression…and only years later did economic historians tag it as a ‘great’ depression.
This depression is still wet behind the ears… We’re still in the bounce phase. On Friday, the Dow went 113 points higher. And as the bounce continues, more and more investors will come to believe that stocks are in a new bull market and that the economy is back in growth mode.
Neither will be true.
The stock market is in a bear market rally, not a genuine bull market. The economy is entering a long depression…possibly a ‘great’ one.
How can we be so sure? Well, we’re not sure of anything. But all the signs point in that direction. Household debt as a percentage of disposable income hit a low of about 2% just at the end of WWII. It’s been going up ever since. By 2005 it nudged against 15% – seven times higher than it had been 60 years earlier. Household debt represents spending that has been taken from the future. But you can’t take an infinite amount from future earnings. You reach a point when the future can’t handle it. As more and more future earnings are absorbed by past consumption, pretty soon there’s not enough left to live on. At some point, so much of earnings are devoted to paying the interest and principle on past borrowings that the poor householder cannot to pay his expenses. And imagine what happens if his disposable income goes down.
Guess how many jobs the US private sector has added over the last 10 years? Almost none. Private sector employment is back to levels of 1999. There are more jobs in restaurants and health care…but many fewer in manufacturing. Net gain: zero.
The only job gains have been in the parasite sector – government. On the evidence, this trend is going to continue. Now, the feds have a new post called “pay czar.” As near as we can tell this is a busybody who undertakes to control salaries in the industries that the feds have bailed out. There will be a lot more jobs running the regulatory/bailout apparatus. Then, too, there are all the make-work jobs of the shovel ready boondoggles the feds began in an effort to replace private spending.
Back in the private sector, 72 banks have failed so far this year. And a record 34 million Americans are getting food stamps.
Naturally, incomes are falling. Now, imagine the consumer…he’s already paying 15% of his disposable income to debt service…and then his income is cut in half! This means that 30% of his remaining income must be used just to service the debt. Impossible to do without big cuts in spending…
The poor consumer hit the wall in 2007. He was spending all he earned…and paying more of his income in debt service than at any time in the last 60 years. He couldn’t continue to living on future earnings – there just weren’t enough of them. That is why the finance industry has topped out. It loaded Americans up with enough debt already.
And it’s why the credit cycle has turned. All of a sudden savings rates are back up to 7%. Consumers are cutting back…raising chickens in their back yards…driving less…planting gardens and squeezing their nickels. The private sector is de-leveraging. And there won’t be any durable economic boom or lasting bull market on Wall Street until this process is finished.
Harvard professor Ken Rogoff says it will take 6-8 years for households to reduce their debts to a more sustainable level. Let’s see. It was reported on Friday that the big upswing in credit over the last 60 years added about $35 trillion in excess debt to the system. But not all of that is private debt.
Taking the period of the bubble years, in 2000 total debt in the United States came to $26 trillion. Now, it’s twice that amount – $52 trillion, of which $38 trillion is private…or more than two and-a-half times GDP. At this level, the private debt absorbs roughly one out of every seven dollars in consumer earnings – in interest and principal payments.
If the private sector undertook to reduce debt back to 2000 levels, it would mean eliminating all the debt accumulated during the bubble years – or about $19 trillion. How long will it take to pay down, write off, inflate away and otherwise shuck $19 trillion? Well, inflation is running below zero – so that is not now a source of debt reduction. Between write-offs and pay-downs, about $2 trillion has already been cut – over, very roughly, the last 2 years. At least the math is easy. At that rate, it will take 19 years.
Now, let’s go back and look at the Japanese. How long have they been deleveraging? Gosh all mighty…19 years. From 1990 to 2009.
Are we looking at a 20-year period of on-again, off-again deflation…of bear market rallies followed by real bear markets…of weak employment and weak or no growth? That’s what I've argued, . Then, the stock market took off…and the bubble years came. It looked like we were dead wrong. Maybe I was just early. Or maybe those bubble years were just a feint…a fake-out that convinced the entire world to invest in stocks and property, just before the biggest crash in history.
8 Comments
Alessandro
This is why ALL CONSUMER CREDIT CARD DEBT MUST HAVE ANY FUTURE INTEREST RATE CHARGES STOPPED, IMMEDIATELY.
I'm not saying forgive the actual credit card debt, I'm saying forgive NEWLY ACCRUING INTEREST on EXISTING consumer credit card debt. Based on this article, ACCELERATING consumer debt reduction at a steady pace, without forgiving the actual debt is the MOST LOGICAL approach to assisting in STABILIZING the economy.
I'd rather have a stable economy than the constant gambling that is putting us farther and farther in debt.
The freezing of ALL INTEREST RATE CHARGES ON EXISTING CONSUMER CREDIT CARD DEBT would instantly save the consumer 15-25 BILLION DOLLARS A MONTH in newly accruing interest rate charges! That constitutes an immediate stimulus directly to where it is needed, no tax money is used, and the banks probably actually will receive MORE of the money that is already owed to them as credit card defaults start to drop. It's a complete win all the way around.
My fear is that the newly accruing 15-25 billion dollars a month in interest rate charges is being used to balance out the war efforts in Iraq and Afghanistan, therefore meaning the wars are truly preventing the government from taking the next logical step in helping fix our own economy.
I'd rather have a stable economy than the constant gambling that is putting us farther and farther in debt.
http://www.daily-protest.com
http://www.bloggersagainstchase.com
http://www.robotsagainstchase.com
therooster
It's a common misconception that interest is a problem and the obvious conclusion to that is to have zero interest on new credit creation and other forms of loans. VERY DANGEROUS ! Interest in not a problem when currency is created from real assets but this is not the case. Currency is primarily created from thin air and a promise to pay. The promise is a future based derivative.
What no interest attempts to accomplish is to satisfy the problem that debt cannot be repaid with existing currency alone when P < P + I ..... where "P + I" is indicative of the currency supply(debt) plus interest, and currency supply for interest is never created. This is good logic on the basis of debt management, but it does not take into consideration the challenge of the "hidden tax" of inflation. The issue of currency supply created has to be a major priority along with debt management.
The magic of gold.
Gold is not a debt currency. It's an unencumbered asset. As such, it does not have to be "loaned into existance". It can be worked in circulation without encumbrance. As such a currency supply can be created in relation to gold (does not need a fixed peg either) such that there is no associated debt. This allows for the reduction in the ratio of total debt (P&I) to the currency supply (P , only) because liquidy can be enhanced without new debt.
This can only be achieved by an asset based system, however. The money must be able to enter circulation without associated debt ........ an asset. This is why interest appears to be a problem in the fiat based debt money system. The problem is not interest, it's debt money created from nothing in its "genesis" and the inability to bring debt-free money into circulation to make up for "interest money supply".
therooster
Once the currency is created, the damage is done. The currency created from nothing is property of its creator and any interest that's applied is simply an afterthought on a systemic level. The problem is caused in the creation, not the interest. Before someone gets their first credit card statement, the horses have already left the barn.
If the focus is on interest rather than creation, then the seed of consciousness to turn away from the banks and look toward gold as a currency will get lost or diluted. This is the danger in not understanding the problem created. If the market turns toward gold and its rise justifies monetization, then you have a currency that can enter circulation on a debt free basis. This allows enough currency into circulation to cover principle & interest on an ongoing basis and the need to return to the bank lenders becomes diminished and can eventually end, in time. This is only characteristic of an asset based currency, however and cannot be accomplished with a debt based currency such as the ones that have permeated the western world.
When currency enters circulation as a function of borrowing (credit creation), as is the case with dollars, then total debt always surpasses the amount of currency that was created. eg : P < P + I Think of P as being created credit from nothing and as being the sole currency supply. The market is always forced to go back to the lender (banks) just as a drug addict needs to go back to his/her dealer for another hit. The power of this vicious control cycle is based on the creation of currency from nothing but "pen and ink". The problem of interest is a compounded afterthought that is not a problem when currency supply (P) can be entered debt free, where there is less interest payable on a systemic level. The equation eventually balances and depending on how much gold is mined and spent into circulation versus how much gold would be lent into circulation, this equation can turn positive in the sense that the currency system will have "net credit" rather than "net debt". Note that the equation has to account for both types of currency to be properly understood. (asset and debt). They will co-exist ..... and should.
The above is of little comfort for card holders that have a problem today or this month, but the solution has to be addressed systemically or nothing will change as to who has power.
We are here to balance the power equation. Strike the root.