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:

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:

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:

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.

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