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So, individuals and companies are doing the right thing...it's the Federal Government that is ing up...
No, it's not what you think, and this explains, far more than anything the executive or legislative branch has done, why the economy is spluttering along.
WASHINGTON (Marke ch) — Everyone knows America has too much debt. What they don’t know is that things are getting better, not worse.
Little by little, our economy is reducing its debt burden, slowly repairing the damage caused by 10, 20 or 30 years of excess.
If you want to know why economic growth has been so tepid, here’s your answer. Four years after the storm hit, the economy is still deleveraging. And it’s very hard for any economy to grow when everyone is focused on increasing their savings.
Total domestic — public and private — debt as a share of the economy has declined for 12 quarters in a row after surging over the previous decade.
The rapid rise in federal debt over the past four years has distracted us from the big picture. The level of public debt is indeed worrisome, but it’s not as big a worry as the economy’s total level of debt — public and private.
Although we have a whole cottage industry devoted to warning us about the dangers of too much public debt, we don’t have any comparable Cassandras telling us about the dangers of too much private debt. Yet the history of the past 30 years (or 300) clearly shows that too much debt, of whatever variety, can pose a systemic risk to the national and global economies.
As much as we hear politicians, pundits, tea-party patriots and the Congressional Budget Office obsessing about government debt, it was excessive private debt — not public debt — that caused the 2008 financial meltdown. And it was private debt — some of it since transferred to the public — that lies behind the current European debt crisis. (Greece is unique in having a public sector that ran up spending while its private sector is rather conservative.)
As the political rhetoric about the federal deficit has heated up, we’ve lost sight of the progress that’s been made in bringing total debt back under control. The U.S. is actually doing much better than you’d think if you just listened to the conventional fears about how we’re rushing headlong into a debt Armageddon.
In fact, since the recession ended in June 2009, total U.S. debt has risen at the slowest pace since they began keeping records in the early 1950s. While Washington has taken on a lot of debt since then, the private sector has paid off, written off or dumped on the government almost as much.
As a share of the economy, debt has plunged as a consequence of rapid deleveraging by families, banks, nonfinancial businesses, and state and local governments. The ratio of total debt to gross domestic product has fallen from 3.73 times GDP to 3.36 times.
In the 11 quarters since the recession officially ended, total domestic debt has risen by just $702 billion, or 1.4%. By contrast, in the 11 quarters before the recession began, in those bubble years of 2005, 2006 and 2007, total debt increased by $10.7 trillion, or 28%.
And it wasn’t just the U.S., other advanced economies were adding on to their debt loads as well, with most of the debt taken out by the private sector.
Debt was growing at an unsustainable pace, but it was fueling the U.S. and global economies.
Economists who have studied the impact of indebtedness have found that low levels of debt are essential to growth, but that high levels of total outstanding debt can hurt an economy. Beyond a tipping point, adding on more debt will reduce growth over the long run, even if it inflates a bubble in the short run.
“At low levels, debt is good. It is a source of economic growth and stability,” concluded Stephen Cecchetti, M.S. Mohanty and Fabrizio Zampolli, economists for the Bank of International Settlements, in a paper presented at the Federal Reserve’s Jackson Hole conference last August. “Beyond a certain point, debt becomes dangerous and excessive,” and can lead to increased volatility, financial fragility and slower growth. It can even bring down the real economy with it, as we have seen. Read the BIS paper, “The Real Effects of Debt.”
Cecchetti and his co-authors found that growth can be impaired once nonfinancial corporate debt hits about 90% of GDP, or when household debts hit 85% of GDP, or when public debts hit about 85%.
In the U.S., household debt has now fallen to 84% of GDP from a peak of 98%. Nonfinancial corporate debt has fallen to 77% from a peak of 83%. Financial sector debt has plunged from 123% of GDP to 89%. Public debt has risen to 89% from 56%.
The deleveraging process in the private sector still has a ways to run, not based on some economists’ rule of thumb, but based on what real people are actually doing. Banks and households are still slashing their debt, while nonfinancial companies are beginning to borrow again, but only a little, according to the latest data from the Federal Reserve’s flow of funds report. Take a look at the flow of funds.
According to a study by McKinsey published earlier this year, U.S. households may have two more years of deleveraging left before their debts are sustainable again.
If McKinsey is right, the U.S. economy may have to endure a couple more years of slow growth.
Rex Nutting is a columnist and Marke ch's international commentary editor, based in Washington.
http://finance.yahoo.com/news/u-debt...040045522.html
It isn't oil prices, but a very welcome paring down of our collective private sector debt.
Pick who you want in November, just don't harbor any illusions it will make a 's worth of difference to the economy for the next couple of years, unless it is another Tea Party run, in which case, you can expect a good chance that US sovereign debt gets downgraded again.
A combination of higher energy prices, together with this will extend the tepid growth of the US economy, IMO.
So, individuals and companies are doing the right thing...it's the Federal Government that is ing up...
I'd say it's more like those who can't print their own money are acting one way and those who can print their own money are acting another.
... which is as they should.
Seems to me like the ones who can print their own money are the ones in the most trouble.
That's true. And we are printing the out of it too...Up 400% since Obama took office.
You are giving individuals and companies way to much credit. They didn't have a choice in having their debt loads go down. When housing prices began to plummet, individuals lost the greatest source of borrowing power they had. The gravy train came to a stop. Companies couldn't take on more debt because of the lockup in the credit markets caused by the financial crisis. This deleveraging is a consequence of the Great Recession, not something the private sector did willingly.
I dunno about that. I started about 10 years ago de-leveraging....I'm in the process of going to the opposite extreme now and refi and take 75% of the equity out of my house and go long again for 30 years. Mortgage interest rates (manipulated by the fed) are just too stupidly low. I'm gonna do a big addition on my home and bet that the house appreciates at a higher rate than the interest I am paying (especially after deducting it from my income tax) and enjoy it while I am doing it.
Interest payments, Repug wars, tax expenditures, and deficit really handed Barry a huge pile of in Jan 09.
People are shoving money at short term treasuries at rates below inflation, and the rates on the US Sovereign debt we are incurring are at historic lows. That means the demand for that debt is so great people are willing to explicitly lose a little money.
We should be borrowing MORE at the Federal level, not less, especially given the massive infrastructure debt we are running up.
The longer we wait the more expensive that will become to fix.
After this private deleveraging has run its course, we can expect growth to pick back up to historic norms, and that will more than pay for any low-rate debt we have rung up in the last few years.
Partly.
The analysis I have seen elsewhere says that it is partly the fact that banks are not as willing to lend, and partly that people are much more reluctant to borrow.
Either way bodes well for a few years from now.
In spite of the silly low rates, investors, home and abroad, are pouring into Treasuries. It's the perfect time to for the US to sell bonds and use the money for a few $T in stimulus.
Risky move. Home values may not appreciate as highly as they did during the housing bubble again. That bubble was fueled by high demand due to relaxed lending practices. In fact, contraction could (and probably will) occur again at a future date.
Homes in SA are appreciating at 5% on average and my property is a really unique property. When I'm done I'll have a tricked out 4000sf house on 2 mostly wooded acres with huge oak trees (except for the barn and riding arena) less than two miles outside of 410 on the Northside near I10 and the med center. I think it will appreciate faster than 5% and the right person will scratch ink for a load of money when i finally decide to sell.
After tax the interest rate is 3%. I'll bet the house will appreciate faster than that.
The Great Recession Drove Median Family Wealth To Its Lowest Level Since 1992
American families’ median wealth dropped from $126,400 in 2007 to $77,300 in 2010, according to a new survey of consumer finances from the Federal Reserve. The 39 percent drop brings average net worth to the same rate as it was in 1992, due mostly to a significant plunge in the worth of families’ homes. Despite some signs that the economy is stabilizing, the Fed points out that this type of recovery has not yet begun to affect the results of their consumer survey — indicating that American households are still struggling to regain their footing after the recession
http://thinkprogress.org/economy/201...n-wealth-1992/
Meanwhile, the 1%'s share of national income continued to increase rapidly.
Par for the course.
Careful...
You are a prime example of the rich getting richer, and the poor getting poorer.
Too bad they don't understand it's because you make wise decisions, and the poor don't.
Absolutely no.
We already have too much national debt being burdened on my children their children, etc.
It needs to stop.
Do you really want to make our current situation marginally better by borrowing from the futures prosperity?
Long term, they will go up again. Right now, borrowing on a house and putting it in a well diversified stock portfolio would probably pay off real big.
From 2011 to 2012 we lost an average of 4% on our houses. I think its a wise move on your part to borrow while rates are low. I wouldn't set my expectations at anything beyond enjoying the new digs though.
Newsflash. The rich make poor decisions as well. Stupid .
Or in other words:
"the poor don't make good decisions"
There you have it.
The worst form of judgmental prickdom possible.
If you are poor, you automatically make bad decisions. You are poor because you are morally flawed in some way.
I have little doubt that had you been alive in '32 Weimar Germany, you would have enthusiastically voted for the NASDAP. I would go so far as to say you would have helped shove people into rail cars a few years later. I dont' say that lightly.
That kind of amorality drives the kinds of right wing politics in acendency in the US.
At least you are clear about being amoral.
You can't go by median price. You have to break it down by neighborhood. Houses on the south and west side are losing value, houses on the near northside are appreciating at double digit rates in some areas.
http://www.zillow.com/local-info/TX-...-value/r_6915/
At some point, the inventory of overbuilt new houses will be absorbed by population growth.
Houses will start appreciating again. It remains to be seen when that will be tho'. The 10 trillion dollar question, so to speak.
Imagine how ed Ireland is. I heard on NPR they went so ape that they built about one house for every person in the country.
Read more here: http://www.mcclatchydc.com/2012/06/0...#storylink=cpyFrom 1991 through 2010, Ireland built 933,000 homes, nearly doubling its housing stock. (Even with Ireland’s growing population, that worked out to 1.5 new homes for every new household, according to government data.) Construction came to account for 14 percent of the economy as banks funneled the majority of their loans to real estate and politicians ins uted tax breaks to spur building in every corner of the country.
We may have it bad, but if you want to move to Ireland, it is going to be really really cheap for decades.
, I may consider retiring there if the housing doesn't literally fall over from disuse by then..
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