Credit Nation: The Back Breaking Debt Problem in the United States.

With so much talk about the credit crisis you would think that many people would realize that not all credit is good for you. So what is the reaction of our central bank leaders? They decide to extend more liquidity to banks but the only problem is the majority of the population is already maxed out. No longer can they support back breaking monthly payments. The credit card offers in the mail are now subsiding. There was a point in time where I was receiving an incredible 3 to 5 offers per day. It was simply unbelievable and unsupportable. As we have discussed in a previous article, residential real estate is predicted to decline by 20 to 30 percent and $20 trillion in wealth is stored here. You can imagine what is going to occur when prices start declining even further. We are only in the first rounds of the credit retrenchment and already our economy is on the verge of a recession.

Let us take a look at a very important chart, household debt service as a percent of disposable income:

Household debt

As you can see from the above chart we have been on a steady upsurge since the 1980s. Even during the technology bubble and the current housing bubble average households didn’t feel richer because more and more of their money went to service their debt obligations. At this point we have reached a plateau of nearly 14.5 percent of disposable income used to service debt. In the early 90s we tried a bit to scale back but it is extremely hard to resist plunking down all your money on AOL stock options. Let us look at another chart that takes a look at household credit market debt outstanding:

Credit Debt

Currently there is an amazing $13.64 trillion in debt outstanding. As we mentioned with the $20 trillion in residential wealth, a 20 percent decline will wipe out $4 trillion in wealth while the debt outstanding does not change. What we are seeing is a convergence of equity plowing into reserve wealth. When this occurs you see a negative wealth effect and a retrenchment in consumer spending. If you are wondering why the government is so eager to send us checks in the mail this is why. The US economy is based on 70 percent consumption. Any small decline in this massive part of the economy is enough to tip us into a recession. That leads us into our next chart, retail sales:

Retail Sales

The above chart shows retail sales year over year changes. As you can see, the last time we went year over year negative was after our 2001 recession. If we aren’t technically in a recession, we’ll soon be in one and this one is looking more like the early 1980s recession. Time to cut up those high interest credit cards.

RSSIf you enjoyed this post click here to subscribe to a complete feed and stay up to date with today’s challenging market!



1 Comments on this post


  1. Build Massive Wealth With Foreclosures. | wrote:

    […] […]

    June 10th, 2008 at 8:07 pm


Subscribe Form

Subscribe to Blog

My Budget 360

Enter your email address to receive updates from My Budget 360:

100% Private & Spam Free.


Subscribe in a reader


Popular – All Time

  • 1. How much does the Average American Make? Breaking Down the U.S. Household Income Numbers.
  • 2. Top 1 Percent Control 42 Percent of Financial Wealth in the U.S. – How Average Americans are Lured into Debt Servitude by Promises of Mega Wealth.
  • 3. Is college worth the money and debt? The cost of college has increased by 11x since 1980 while inflation overall has increased by 3x. Diluting education with for-profits. and saddling millions with debt.
  • 4. The Perfect $46,000 Budget: Learning to Live in California for Under $50,000.
  • 5. Family Budget: How to go Broke on $100,000 a year. Why the Middle Class has a hard time Living in Expensive Urban Areas.
  • 6. Lining up at Midnight at Wal-Mart to buy Food is part of the new Recovery. Banks offering Mattress Interest Rates. The Invisible Recovery Outside of Wall Street.
  • 7. You Cannot Afford a $350,000 Home with a $75,000 Household Income!
  • 8. Crisis of generations – younger Americans moving back home in large numbers. Student loan default rates surging largely due to for-profit college expansion.
  • 9. The next massive debt bubble to crush the economy – 10 charts examining the upcoming implosion of the student loan market. $1 trillion in student loans and defaults sharply increasing.
  • 10. Welcome to the new model of retirement. No retirement. In 1983 over 60 percent of American workers had some kind of defined-benefit plan. Today less than 20 percent have access to a plan and the majority of retired Americans largely rely on Social Security as their de facto retirement plan.
  • Categories