Foreclosures, Inflation to Wipe Out Credit Debt Burden for US Economy

Let’s see…the Dow rose 77 points on Friday. Oil hit a new record – at above US$85 a barrel.

But we always try to look beyond to news to figure out what is going on.

Despite the problems in housing, most Americans are feeling pretty fat and sassy. Living standards – at least, by the standard measures – have soared in the last 30 years. In 1950, the average new house had only 1,100 square feet of space. Now, the average is about 2,400 – even though families are much smaller.

Our cousin from Maryland came to visit in Buenos Aires and brought news from home:

“The area around Washington is a special case. So many people work for the government. And they seem to have a lot of money. Because they’re building these huge houses…6,000 square feet…and the amazing thing is these are usually couples with no children. Both of them work. So, I guess on two government salaries they can qualify for a lot of credit, because I don’t think they have any real money.

“But even around there the housing boom is over. Prices topped out, I would say, about a year ago…now they’re coming down. Not too much so far…but they’re definitely coming down.

“Which is too bad, because I know a lot of these people have houses they paid a lot of money for…thinking they would go up in price. And now, they’re not going up…they’re going down. It must be painful.”

Houses aren’t the only thing getting more extravagant. Back in the ’50s, the typical family had one car. Now, driveways are full of them. And, of course, there are Jacuzzis, air-conditioning, big-screen TVs and all the other paraphernalia of modern life.

From the Eisenhower years to the Bush years, however, the US economy was maturing. In the ’50s, manufacturing profits were half the nation’s total. Americans made things and sold them to foreigners. This left us with money to spend, to lend, to save…or to invest. Typically, we saved nearly 10% of what we earned in the Eisenhower/Kennedy era.

But then came a New Era. The government spent too much in the ’60s…and rather than own up and make good, the Nixon Administration defaulted. “The dollar is our currency, but your problem,” said Treasury Secretary John Connolly in a moment of spellbinding honesty. Then, in 1972, the US trade deficit stood at US$3 billion. Now, the trade deficit is nearly US$3 billion every day!

It did not pay to save dollars in the ’70s. Inflation rose to 12% and made them worth less and less. In a way, this was the lesson Americans most wanted to learn. They didn’t want to save anyway…they wanted to spend. Gradually, the economy shifted from one in which people made things at a profit to one in which they bought things at a loss.

Households turned their attention to how to consume what they had never earned. And business turned its attention to how make money by selling to people who didn’t have any money. The economy itself shifted to one based on manufacturing to one that emphasised marketing…and then finance. Factories rusted. But shopping malls and housing development proliferated.

In 1967, Henry Kaufman was made a full partner at Solomon Bros. in New York. His compensation: US$25,000 a year.

Forty years later, the average hedge fund manager is taking home nearly US$24,000 PER WEEK.

Meanwhile, the average US weekly pay is only US$841 – a figure that is about the same, in real terms, as the average 30 years ago.

And here is the question to which we keep returning, a question that is purely rhetorical:
How can people who don’t earn more money still spend more?

Not only do we know the answer, we’ve given it to Dear Readers countless times: they borrow.

Total US credit debt rose during the Greenspan years alone from US$9.8 trillion to US$37.3 trillion – a 400% increase. That is the weight now pressing down on the US economy. That is the burden that must be lightened.

And it is being lightened – in two ways. Many debts are going bad. House foreclosures in September doubled from the year before, for example.

The other way it is being lightened is by inflation. Every day, people add more debt…and inflation takes a little more off. In the last 30 years, consumers, business and speculators were able to add debt a lot faster than inflation took it off. But now, debtors are already stretched to their limits…and creditors are getting persnickety. A Reuters report tells us that consumers have switched to credit cards in order to continue spending. Home equity lines and mortgage refinancing has fallen from favour.

Eventually, inflation will wipe out debt. The 1,000% inflation rates in Argentina in the ’80s eliminated most debt. Still today, the country has very little debt.

Is it hard to get a mortgage? We don’t know, but if anyone is lending money in Zimbabwe, he should probably seek medical attention and bankruptcy protection; with an inflation rate of 100,000% per year – he will be wiped out overnight.

In America, the process has a long way to go. Official inflation rates are only 2%-3%, though consumers report price hikes much greater than that. Still plenty of excitement ahead!

Stay tuned…

Bill Bonner
Markets and Money

Bill Bonner

Bill Bonner

Since founding Agora Inc. in 1979, Bill Bonner has found success and garnered camaraderie in numerous communities and industries. A man of many talents, his entrepreneurial savvy, unique writings, philanthropic undertakings, and preservationist activities have all been recognized and awarded by some of America’s most respected authorities. Along with Addison Wiggin, his friend and colleague, Bill has written two New York Times best-selling books, Financial Reckoning Day and Empire of Debt. Both works have been critically acclaimed internationally. With political journalist Lila Rajiva, he wrote his third New York Times best-selling book, Mobs, Messiahs and Markets, which offers concrete advice on how to avoid the public spectacle of modern finance. Since 1999, Bill has been a daily contributor and the driving force behind Markets and Money.
Bill Bonner

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