Monday, October 3, 2011

Consumer debt, not federal debt, is the crisis

The real debt problem in the U.S. is private household debt. U.S. federal debt by historical standards is still manageable and not in a crisis; it's not holding the economy back; although long term it must be faced. Right now consumer/household debt -- which is still at 154 percent of wages and salaries -- is the crisis. Until Americans clean up their personal balance sheets and start spending again, all kinds of businesses which depend on them for sales won't start increasing capacity or hiring again.

Without some gov't policies to induce home mortgage modifications, speeding foreclosures, and debt write-offs, the de-leveraging process will take several years, perhaps a decade, of needlessly low economic output, which will in turn cause lower tax receipts and more strain on the federal budget than necessary.

This is pretty basic economics and yet it is such a sore political topic, which forces me to conclude that that many Americans are willfully ignorant about it. Also, I think there is some deep-seeded American moralism at play here: many believe we should "take our medicine" and suffer for our mistakes, even if that suffering is needless and the "innocent" suffer, too.

If you want a more detailed explanation then read this analysis by Henry Blodget of Business Insider: HERE'S WHAT'S WRONG WITH THE ECONOMY... (And How To Fix It): We must "reduce the debt that is crippling the productive part of the economy:" consumer debt.

By Karina Frayter
October 2, 2011 |

No comments: