Much is made of the fabulous debt burdens of the US federal and state governments. However, the US consumer's balance sheet is equally as debt burdened.
In 1975 total household debt—including mortgages, credit cards, auto loans and bingo wagers—was about $730 billion or 45% of GDP
During the 1980’s, however, this long-standing household leverage ratio began a parabolic climb, and never looked back. By the bubble peak in Q4 2007, total household debt had reached $13.8 trillion and was 96% of GDP.
Yet after 36 months of the Great Recession wring-out, the dial has hardly moved: household debt outstanding in Q4 2010 was still $13.4 trillion, meaning that it has shrunk by the grand sum or 3% (entirely due to defaults) and still remains at 90% of GDP.
Wall Street stock pushers have noted that the ratio of debt to disposable personal income (DPI) has dropped materially, and that this proves the household sector has been healed financially and is ready to borrow again. This ratio has fallen to 116% from a peak of 130% in late 2007.
Yet, this is almost entirely due to an enormous increase in government transfer payments. Even still, the ratio is atrocious.
A better gauge, however, is Household debt to private wage and salary income which amounted to 255% of at the peak of the credit boom in late 2007, and was still 251% in Q4 2010.
Meanwhile, consumer spending as a percentage of GDP - which stayed in a range of 61% to 64% from 1960 until 1980 - has ballooned to 70% of GDP.
Charles McKay summed up this debt madness of the last 30 years in two quotes from his book Extraordinary Delusions and the Madness of Crowds, written in 1841.
“Money, again, has often been a cause of the delusion of the multitudes. Sober nations have all at once become desperate gamblers, and risked almost their existence upon the turn of a piece of paper.”
“Men, it has been well said, think in herds; it will be seen that they go mad in herds, while they only recover their senses slowly, and one by one.”
So now, the Boomers are turning 50 years old at a rate of 10,000 per day. A staggering 38% of workers between the ages of 45-54 have less than $10,000 of retirement savings and a mind boggling 29% of workers over 55 have less than ten grand in their retirement savings.
It doesn't take a genius to imagine what will happen to real GDP over the next several years as consumer spending contracts. Anybody who can't see that this must happen is blind, hopelessly partisan, or both.
The only issue is: what will be the Government's response?
If you believe politicians in both parties will come together to selflessly work in the interest of the nation to reign in spending, cut their own salaries in half, fire all non-essential workers, close our 180 military bases around the world, end the three pointless wars, defund the insolvent portion of medicaire, raise the social security retirement age, and raise tax rates on the wealthiest one percent, while sponsoring infrastructure work programs to help the 20 percent of the population that has become structurally unemployed, and most of all: raise rates at the expense of the banking cartel to reward savers - then you should probably hoard dollars, work hard and get your own savings rate up.
If you believe the government will desperately keep printing money (which means issuing new debt) to keep the illusion of well being alive as long as humanly possible, you better buy as much gold and silver as you can afford, because it is the only thing that will keep you solvent.
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