The United States of Debt Addiction: Our reliance on debt has created an entire economy fortified in the fires of moral hazard and fiscally dangerous leverage.
16 point 7 trillion dollars. That is our current national debt. 12 point 8 trillion dollars. That is the amount households carry in mortgage and consumer debt. We are now addicted to debt to lubricate the wheels of our financial system. There is nothing wrong with debt per se, but it is safe to say that too much debt relative to how much revenue is being produced is a sign of economic problems. At the core of our current financial mess is how we use debt as a parachute for any problem. We’ve been masking the shrinking of the middle class by allowing households to take on too much debt for a couple of decades. The results were not positive. Too this degree, we have now created a massive moral hazard economy where savings are punished into oblivion. There is very little incentive to put your money in a bank account yielding zero percent interest when real inflation is eating away at your money like a hungry wolf. So what do people do? Well many simply cannot save and therefore choose to go into debt to finance cars, housing, and education with very little down. Where does this debt addiction lead us?
A little bit of deleveraging
US households have deleveraged from the peak in the crisis. However, much of this deleveraging has been forced via the 5 million foreclosures that have occurred:
I’m not sure if we can interpret that as some sign of a healthy and growing economy. Households have had their access to debt limited in many sectors. Yet one sector that never retreated was that in higher education. There is little doubt that there is a major bubble in higher education. Instead of addressing the problems head on we now have more access to debt as the solution. In order to compete in our service driven economy, having a skill is very important. Most will make the investment to pursue a college degree but the issue is that with easy access to debt, prices have soared. It is no surprise that college prices are following the trajectory of what happened in housing.
If you look at the above chart, a big part of the contraction has come from deleveraging from mortgages and credit card debt. Yet we are now once again loading up on auto debt and college debt. The system is now setup to punish any type of savings. Good luck trying to stash your money in a bank account and outrun even the steady pace of inflation.
Take a look at the current savings rate for Bank of America:
Of course the Fed has a hand in all of this. The Fed realizing that our system for over a decade has been juiced by debt spending, had to step in and make it unattractive to save to the point that people are willing to dive into risky investments yet again. Because of this however, you create moral hazard.
Read the rest at My Budget 360