Wednesday , 22 November 2017


U.S.A.: United States of Addiction – Our Insatiable Appetite for Debt

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16 point 7 trillion dollars.  That is our current national debt.  12 point 8 trillion dollars.  That is the amount households carry in mortgage and consumer debt.  We are now addicted to debt to lubricate the wheels of our financial system.  There is nothing wrong with debt per se, but it is safe to say that too much debt relative to how much revenue is being produced is a sign of economic problems.  At the core of our current financial mess is how we use debt as a parachute for any problem. [Unfortunately,] addictions are never easily cured and we have yet to come to terms with our insatiable appetite for debt.  Words: 850

So writes MyBudget360 (www.mybudget360.com) in edited excerpts from a post entitled The United States of Debt Addiction:  Our reliance on debt has created an entire economy fortified in the fires of moral hazard and fiscally dangerous leverage.

This article is presented compliments of www.FinancialArticleSummariesToday.com (A site for sore eyes and inquisitive minds) and www.munKNEE.com (Your Key to Making Money!) and may have been edited ([ ]), abridged (…) and/or reformatted (some sub-titles and bold/italics emphases) for the sake of clarity and brevity to ensure a fast and easy read. Please note that this paragraph must be included in any article re-posting to avoid copyright infringement.

The article goes on to say in further edited excerpts:

We’ve been masking the shrinking of the middle class by allowing households to take on too much debt for a couple of decades.  The results were not positive.  Too this degree, we have now created a massive moral hazard economy where savings are punished into oblivion.  There is very little incentive to put your money in a bank account yielding zero percent interest when real inflation is eating away at your money like a hungry wolf.  So what do people do?  Well many simply cannot save and therefore choose to go into debt to finance cars, housing, and education with very little down.  Where does this debt addiction lead us?

A little bit of deleveraging

US households have deleveraged from the peak in the crisis [as can been see in the chart below].  However, much of this deleveraging has been forced via the 5 million foreclosures that have occurred but I’m not sure if we can interpret that as some sign of a healthy and growing economy.

total us debt

[While] households have had their access to debt limited in many sectors…higher education [is not one of them].  There is little doubt that there is a major bubble in higher education.  Instead of addressing the problems head on we now have more access to debt as the solution.  In order to compete in our service driven economy, having a skill is very important.  Most will make the investment to pursue a college degree but the issue is that with easy access to debt, prices have soared.  It is no surprise that college prices are following the trajectory of what happened in housing.

If you look at the above chart, a big part of the contraction has come from deleveraging from mortgages and credit card debt yet we are now, once again, loading up on auto debt and college debt.

The Fed has Made It Unattractive to Save

The system is now setup to punish any type of savings.  Good luck trying to stash your money in a bank account and outrun even the steady pace of inflation. [Just] take a look at the current savings rate for Bank of America:

bank of america

Of course the Fed has a hand in all of this.  The Fed realizing that our system for over a decade has been juiced by debt spending, had to step in and make it unattractive to save to the point that people are willing to dive into risky investments yet again.  Because of this however, you create moral hazard.  For example, with housing you have many government backed loans that are now accessible with very little down.  In fact, this has been the path of ownership for most Americans since many are without savings.

Many Americans in Desperate Straits

1 out of 3 Americans has no savings and nearly 50% are one or two paychecks away from being out on the streets. This is why we have seen such a dramatic rise in food stamp usage [as can be seen in the graph below]:

foodstamps vs payrolls_0

Why save to buy anything when you can simply go into debt for it?  That seems to be the course we are treading on.  We have reached a critical point where our national debt is now higher than our annual GDP.  This crossing of the Rubicon is seen as a major financial tipping point.

Masking of Real Unemployment Rate

We have also mastered how to hide certain employment figures:

unemploymentU3U6U7

A look at the U7b measure – the unemployed + underemployed + discouraged workers – shows various forms of un- or under-employment – is nearly up to 25%….        

What Recovery?

People think that this recovery has come from organic forces when in reality, it has come because of number games and also the Fed injecting trillions of dollars into the banking industry.  Ironically these banks are using this money to speculate in markets like stocks and housing where they are now crowding out working and middle class Americans.  When you have access to a printing press with no restraints, it becomes too tempting to spend into oblivion.

Conclusion

Instead of confronting the core problems of the crisis, we are simply repeating them yet again; easy access to low down payment mortgages, easy access to student debt, consumer credit slowly expanding, and major Wall Street speculation.

Addictions are never easily cured and we have yet to come to terms with our insatiable appetite for debt.

Editor’s Note: The author’s views and conclusions are unaltered and no personal comments have been included to maintain the integrity of the original article. Furthermore, the views, conclusions and any recommendations offered in this article are not to be construed as an endorsement of such by the editor.

*http://www.mybudget360.com/united-states-debt-addiction-and-moral-hazard-financial-leverage/ (For a RSS feed of all articles posted on mubudget360 go here)

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One comment

  1. No surprises, since there are almost no jobs to be had, the Gov’t. is keeping our loan rates too high while they are loaning Big Banks money at almost zero interest rates and not dealing with the cause of the problem, GREED in Congress that is insuring that the Wealthy get far more wealthy, which is destroying what is left of the middle class!

    Until retired and regular people can qualify for a home loan the housing market will remain dead, and that will remove home ownership from the American dream….
    Said another way, the Rich are insulating themselves from ever having to worry about being poor!