Friday, December 5, 2008

It's the Debt, Stupid

I'm beginning to believe that America, the whole country, has hit her debt limit. Consider:
  • The federal government owes $10.6 trillion. By contrast, the Russian government's debt is zero. That's right, zero.
  • The increase in federal debt over the last year was about $1.4 trillion.
  • Total mortgage debt is about $12 trillion.
  • Total credit card debt is around $1 trillion.
  • 110 million Americans have bad credit -- that's almost half of the roughly 240 million adults in America.
  • Total American debt (household, business, financial and government) is $53 trillion.

    All this on a $14 trillion yearly GDP.

    One consequence, the American government must come up with over a trillion dollars a year to service the debt. Assuming an average 10 year term, $1 trillion is needed to pay off bonds coming due every year. Assuming 3% interest, we need $300 billion/year to pay interest. That's $1.3 trillion per year in taxes or borrowing to get -- nothing. The money has already been spent. Unless we pay down the debt, this will continue forever.

    America has been living high on the hog by borrowing, and someday that borrowing will have to stop. That day appears to have come. We must live on what we earn, minus very large debt payments. That means we have to buy less. That's ok, our garages are already stuffed with expensive stuff we don't use.

    There's a chart of different parts of the debt from 1957 to now at The two parts that have really taken off are financial sector debt and household debt. Financial sector debt appears to have been created by clever people lacking regulation so they could get rich on commissions. The household debt has been financed by rising home values. This allows people to borrow against their home.

    Unfortunately, while rising home prices allow home owners to borrow, it doesn't help them pay off the loan. High housing prices are bad because everybody, forever, must devote a great deal of their income to keeping a roof over their head. Fortunately, prices are coming down. Before the bubble median house prices were about three times median income. Median income is about $50K, so median house prices will probably fall until they reach about $150K. They're about $200K now.

    If this line of reasoning is correct, financial rescue attempts based on getting people to borrow money will fail, although perhaps not right away. The good news is that buying more stuff wasn't going to make our lives much better anyway. The bad news is that adjusting to living within our means and paying down our debt will be very painful. The millions losing their homes, jobs or both have already noticed that.

    There is some reason to hope for better times. Specifically, the price of oil is almost back down to what it was before the big rise, and that will make everything cheaper. Second, the economy is strongly influenced by the President and the incoming guy is extremely intelligent.