This has to be as close to 1929 as you can get.
Everyone is a speculator.
Massive debt at all levels, including margin loans.
Derivatives.
Interest only loans.
Stock bubble.
Housing bubble.
Demographics bust.
Hubberts peak.
Incomes not keeping up.
Negative savings rate.
Spend Cycle
An economist talks about the scope of America's growing consumer debt, what's behind it and what it means for the future
Unless income rises or prices slow down, more people are likely to default on their loans, says Weller. Here, foreclosure agents strip belongings from an Ohio home.
Unless income rises or prices slow down, more people are likely to default on their loans, says Weller. Here, foreclosure agents strip belongings from an Ohio home.
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Mike Munden / Columbus Dispatch-AP
United We Owe
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WEB EXCLUSIVE
By Jessica Bennett
Newsweek
Updated: 6:05 p.m. ET Aug. 8, 2006
Aug. 9, 2006 - For the first time ever recorded, Americans owe more money than they make. Household debt levels have now surpassed household income by more than eight percent, reaching 108.4 percent in 2005, according to a May 2006 study by the Center for American Progress. Consumer debt is now at a record $2.17 trillion, reports the Federal Reserve Board and consumers cashed out a whopping $431 billion in home equity last year.
Christian E. Weller, the author of a recent Center for American Progress (CAP) report, 'Drowning in Debt,' says the middle class, specifically, is struggling. Wages have been stagnant and they're losing the battle to keep up with the cost of living. "The data shows that people are borrowing more money not because of over-consumption, but because they're caught in a bind," says Weller, a senior economist at the CAP. "In that bind, the only escape valve for middle class families is to borrow more money." NEWSWEEK's Jessica Bennett spoke with Weller about the scope of America's debt, why it's so hard to get out from under, and how it will affect the economy in the future. Excerpts:
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'It's not easy to shed debt,' says Weller
NEWSWEEK: How big has America's debt problem become?
Christian Weller: The scope of the problem is large and it's growing. We now have the highest level of debt relative to income on record since the 1950s [when the Federal Reserve Board started keeping track]. We also have the highest debt payments [interest and principal] relative to income since the 1980s ... We're in a unique world that we've never seen before, [and] what's surprising is that we've reached these levels in a time of historically low interest rates. So from that perspective, you know that going forward [our debt levels] can only go up.
Is credit more available to more people now?
The expansion of the credit industry has given people more access to credit, no doubt about it. [But] I would argue that people are borrowing more money now than in the past [not because of more access to credit] but because prices have risen in the face of a very weak labor market. As for housing, the home equity cash out equaled $431 billion in 2005 [for spending other than home improvements]. That's a substantial contribution to households' resources that they can then spend on all kinds of things: sending their kids to college, buying a new car, paying for health care and other things. We know home equity cash outs are extremely sensitive to interest rates, they're also very sensitive to home-price depreciation. So you don't even need to have a crash in the housing markets to really see severe economic consequences.
Why are so many Americans falling into debt?
The labor market has been rather weak, employment growth has barely kept pace with population growth, wages have been flat, income has fallen for five years in a row, and at the same time, prices for critical big ticket items-items such as health care, housing, college education—have gone through the roof. In that bind, the only escape valve for middle class families is to borrow more money.
The chairman of the Federal Reserve Board, Ben Bernanke, recently expressed concern over the increasing availability of credit to U.S. families, including the extension of non-traditional mortgages. How significant is this?
The realization by the Federal Reserve that there is a housing bubble, that this is beyond what can be justified, is certainly noteworthy. The question is, where does that leave us? The Federal Reserve, under both Bernanke and [Alan] Greenspan, has done two things: they've talked about it more than they did with the stock market, and they've also continued to raise [interest] rates for basically two years now. It's unclear now whether the efforts by the Fed to raise interest rates were meant to slow the housing market or to have a tool at their disposal to stimulate the economy again when the market slows down. It's really unclear what their thinking was, whether it was meant to burst the bubble or to have a tool to recover when the bubble bursts. I think most people would believe the latter.
Your report shows that household debt has now reached 108.4 percent of household income. Can you put those numbers into context?
In 1952, the average debt to income (disposable income) ratio was less than 40 percent. Now, it's 126 percent. Debt has really risen much faster than our income. [And] I don't want to say that all debt is bad, but the growth we've seen in the last few years is unsustainable. And it's not sustainable because of the reasons for which people borrow. People borrow because they're caught in this bind of a weak [labor] market and rapidly rising prices. What that means is that eventually, unless income rises or prices slow down, people will have a really hard time making payments. And if they have a hard time making payments, there are two responses: there's going to be less debt taken out to fuel consumption and a lot more people will default.
What could the outcome of something like that be?
If default rates go up, banks then become more worried about lending money, and the first people hurt by that are small businesses ... The outcome is slower economic growth, which means a slower labor market [and] less wage growth.
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