This cancerous debt consumes our US government, its private business sector, and the lives of its citizens. As we’ve already seen, it has spread to almost every country the world over, likely their businesses and citizenry, too.
As already cited, America's private sector debt is also troubling:
Overall, the eighties began a quarter century in which the totality of debt as a share of GDP would balloon, but with a heavy bias towards private debt, which would figuratively rocket. [iv]
In earlier manias, the bubble was confined primarily to one bit sector. Not this time around! Beyond the $14.8 trillion in mortgages in the United States, there was another $20.4 trillion in consumer and corporate debts. This meant that mortgages represented only 42% of the private-sector debt problem in the country. Result: Americans were not only under tremendous pressure to sell their homes due to burdensome mortgages, they were also squeezed by huge credit card balances and by layoffs from employers equally entrapped in debt. [v]
One can read through almost every principle of economics text, or even money and banking texts, without learning that private debts are several times larger than public debts and growing in a totally unsustainable fashion. [vi]
The American debt situation and the American money epidemics -- there were three of them -- are in a class by themselves . Given the way in which both firms and households had run into debt during the 20s, it is clear that the accumulated load -- in many cases, though not in all, very sensitive to a fall in price level -- was instrumental in precipitating depression. [vii]
The rise in consumer debt … has been nothing less than phenomenal – from approximately $131 billion in 1970 to more than $794 billion in 1990! … The trend in business debt is not as startling as that of consumers, but it is equally as disastrous…. Total business debt rose from $62 billion in 1970 to just over $700 billion in 1990. [viii]
The corporate business sector as a whole has mostly used the proceeds of its extraordinary volume of borrowing since 1980 to pay down equity through mergers and acquisitions, leveraged buyouts and stock repurchases.... This massive substitution of debt for equity, in conjunction with the onset of record high real interest rates, has sharply raised the debt service burden that the average American business faces. [ix]
Borrowing money was fast becoming the bad habit of choice for American consumers, many of whom were finding it hard to “just say no” or were oblivious to the longer-term consequences of boosting debt exposure to hitherto unseen levels. Households spent a record 13.75% of their after-tax income on servicing required interest and principal payments during the last quarter of 2005. [x]
The government has an income of approximately $1.4 trillion a year. It is spending approximately $1.8 trillion a year. [xi]
Despite the fallout from housing and its resulting impact on US banks, as we’ll explore more later in this book, American citizens continued to carry more and more debt in most every conceivable form of credit peaking in 2009 with some improvement into this 2010 decade. High delinquencies remain in all these areas:
1. Home mortgages;
2. Home equity lines of credit;
3. Credit cards;
4. Auto loans;
5. RV and mobile home loans; and,
6. Personal loans.
And the aggregate consumer credit delinquency index is the same story. America’s excesses from the prior decades continue to haunt you, me, and our fellow citizens right up to this present day. Another picture worth a 1000 words:
[xii]
You might appreciate these additional facts from early 2009 alongside what the above chart is telling us:
1. Junk bond defaults up from 2.4% a year earlier to 9.5% according to Fitch Ratings;
2. A University of California economist predicting that 20% of hotel loans may default in the next 18 months; and,
3. Standard & Poor’s planning to slash rates on $235BN of commercial mortgage-backed securities.
The "crack cocaine" of our generation appears to be debt. We just can't seem to get enough of it. And, every time it looks like the US consumer may be approaching its maximum tolerance level, somebody figures out how to lever on even more debt using some new and more complex financing. For years, I have watched this levering up process, often noting that it was taking an ever increasing amount of debt to produce a dollar’s worth of GDP growth. [xiii]
America was the world's biggest creditor when Ike was president. By Ronald Reagan’s second term, about 15 years into the pax dollarium era, the nation slipped to net-debtor status. In the following 15 years, it broke all records -- becoming the world's biggest debtor and the greatest debtor of all time. [xiv]
America’s debt burden was far too big. By midyear 2008, there were $52 trillion in interest-bearing debts in the United States, including mortgage loans, credit cards, corporate debt, municipal debt, and Federal debt; the Federal government needed another $60 trillion for Social Security, Medicare, and other commitments kicking in at a quickening pace; and US commercial banks held another $182 trillion in side bets called the “derivatives.” Grand total: $294 trillion in the United States alone…. Claus Vogt, coeditor of the German edition of our “Safe Money Report,” shows how, prior to the 1930s, the total debt in the United States represented no more than 170% of our economy. By 2008, it was close to 350% of our economy. Moreover, Mr. Voigt reminds us that this does not even include the high stakes, gambling arena of side bets called derivatives. [xv]
[xvi]
Measured by its level of indebtedness, today's US economy is the worst bubble economy in history. [xvii]
More likely is that the United States will soon suffer the fallout of the live-for-today orgy of borrowing and extravagance that has already foisted an untenable economic and financial burden on future generations. Americans will also confront the daunting impact of what Albert Einstein once described as “the greatest mathematical discovery of all time”: the compounding of interest. [xviii]
There was a symbiotic relationship between the United States, which was happy to consume more than it produced, and China and other Asian exporters, which were happy to produce more than they consumed. The United States accumulated external debt; China and the others accumulated currency reserves. The United States had low savings rates, the others had high ones. There was a similar symbiotic relationship between banks and their customers, especially hedge funds and private equity funds, and also between mortgage lenders and borrowers. [xix]
[xx]
Debt in record quantities had been piled on top of the trillions still extant from the binges of the 80s and 90s, so that by 2007 the nation’s overseers watched a US economy in which public and private indebtedness was three times bigger than that year's gross domestic product. This ratio topped the prior record, set during the years after the stock market crash of 1929 . [xxi]
The growth of home mortgage debt has been a major contributor to the decline in the personal saving rate in the United States from almost 6% in 1993 to its current level of 1%. [xxii]
The entire homeland economy now depends on the savings of poor people on the periphery to keep it from falling apart. Americans consume more than they earn. The difference is made up by the kindness of strangers -- thrifty Asians whose savings glut is recycled into granite countertops and flat-screen TVs all over the United States. [xxiii]
In his 2004 book, Running on Empty , Peter G. Peterson, Chairman of The Blackstone Group, Chairman of the Council on Foreign Relations, and former Chairman of the Federal Reserve Bank in New York, offers these chilling remarks:
If we fail our kids collectively as a nation, if we saddle them with unaffordable liabilities and do not leave them the fiscal and economic resources they need to meet their own new challenges, it will be enough that we “meant” well. Posterity may never entirely forgive us for squandering the national opportunities that our ancestors safeguarded for us.
And Peterson adds these powerful words from the German theologian who witnes
sed firsthand the rise of fascism in Germany, Dietrich Bonhoeffer:
The ultimate test of a moral society is the kind of world it leaves to its children.
I don't know about you, but I sure don't want to stick my children and still further generations with debts from today or at the moment of their births! Don't you agree that you want to do the absolute best by your children, grandchildren, and other generations? Try to leave a better world for them than the one we had?
[xxiv]
It's like rubbing salt into a wound, too, when we both know this debt - sinking generations deep, ALL started with OUR generation. It seems so shameful!
As you will learn further in your reading, it's not our fault only or just our generation either. You'll also discover in the chapters that follow how the storm may bring with it the rains of promise to right this bad financial situation and possibly, making things better in multiple ways.
As we close this chapter on Debt, you might welcome these final words from other Brain Trust members who've been silent so far.
Debt is the historically proven reason behind years of hard economic times ahead for America and the rest of the world. The chapters to follow offer still other important considerations and factors contributing to this inevitable world economic storm. So, are you interested in Real Estate next?
Real Estate
[xxv]
In this chapter, you'll first look at United States real estate beginning with the 2006 peak in housing prices preceding their run-down, the reasons behind this state of collapse, and its dismal impact on the US economy. Next, you'll learn about US commercial real estate and the truth about that market today. Finally, you'll discover what lies ahead for both of these US markets and the indispensable knowledge recommended for protecting yourself, your real estate holdings, and ideally, your business, through this chapter and the others to follow.
If you have an interest or current holdings in foreign real estate markets, consider what is offered to you here on the US real estate market as a template relative to most other nations respectful of each country's debt levels as previously addressed. It will behoove not only real estate related businesses but also homeowners and prospective homeowners worldwide to access this timely information. What could it mean to your money-savings or money-making to know how to position yourself where real estate prices are going to go next?
America’s Housing Bubble grew widely higher into early 2006 before its precipitous decline virtually into this present day. Historical indicators of this top in prices were all around each of us. The frenzied upward momentum for those several years leading up to the this peak were so dizzying that we never looked up long enough to see what was in front of our eyes. The fabric was tearing.
Regardless of the reasoning behind the purchases, house prices have outstripped income by a factor of 6/5 years, according to Harvard University study, helping to create an unsustainable real estate bubble of epic proportions. [xxvi]
From the collapse after the housing market peaked, you've seen glimmers of a possible bottom in housing prices with a rebound to follow. Sadly, nothing to date seems sustained in that "recovery" nor have housing prices bottomed. News of foreclosures is never-ending and Washington's efforts to stimulate housing have only proved disappointing.
The various synthetic mortgage securities were based on the assumption that the value of houses in the United States taken as a whole never declines; individual regions may fluctuate, the market as a whole is stable. That assumption ignored the possibility of a nationwide housing bubble of the magnitude that actually occurred. [xxvii]
As this book even goes to print, there is still more talk of Fed plans to stimulate housing. These efforts will do no better than the many other previous Fed attempts. There is no indication that housing prices will bottom nor that a sustainable recovery is in place, or even likely, in the near future.
[xxviii]
What we're seeing now in the underlying housing market looks a lot like what we've seen for the past couple of years. Temporary upticks in sales. Temporary increases in construction. But ultimately, not the lasting, durable recovery many on Wall Street would have you believe in. The chief economist at real estate firm Zillow.com, Stan Humphries, added that he believes "We're still three to five years away from 'normal' housing market conditions." [xxix]
Just imagine what that follows of historical US housing prices from 1976 until the present day is telling you about the prospect of future prices. This chart, respective of the Coming World Economic Storm, helps to solve the riddle of how much further US housing prices might fall. It suggests that pricing might drift to the indicated support levels of 1993-1996. Do you think that might prove a reasonable bottom level for US housing prices? Have you heard or read any reports of lower support levels based on past year pricings? Does 1982-84 ring a bell? Do you agree that a longer term historical chart of US housing prices might be still more helpful?
Well, now, how do you feel about that pricing bottom when viewing this chart of historical US housing prices from 1890 – 2006? Is 1920-1940 the bottom?
By extrapolating until the present day through the previous chart, this longer historical chart is a powerful eye-opener. The further and further your eyes go back to earlier years on this chart; slowly, your problem with declining US housing prices seems all the more dismal. Instantly, you'll recognize that prices might settle, worst case, at a low consistent with the 1960 to mid-1970s period. And you'll start to feel better about this otherwise gloomy realization when you discover the profitable opportunities this stimulating information delivers to you for money-making in the not too distant future. Could you be ready for that?
You might appreciate the way Martin Weiss puts our housing boom – and collapse - so excellently in perspective in this passage from his 2009 book entitled The Ultimate Depression Survival Guide :
To throw some light on the speculative frenzy and panic that shot through the US housing market in the first decade of the 21st century, the only approximate precedents I could find had nothing to do with homes at all. Rather, they are the Dutch Tulip Mania of the 1630s, the South Sea Bubble of the 1700s, and the stock market panics of the early 1900s.
The seeds of the housing market collapse were sown well before 2007. You probably know that it first began to raise its ugly head through the subprime mortgage problems in 2006.
Did you know who and what started these subprime mortgage loans? When you get to the chapter entitled "Political Failings," you'll get a more complete explanation on this subject and much more.
During his years in office from 1993-2001, US President Bill Clinton championed the belief that all Americans were entitled to home ownership. Utilizing the quasi-Federal government arm of Fannie Mae, he pressed his case. The result was the significant flow of subprime loans and other unusual, liberalized lending practices behind the real estate boom - and the setting up for the inevitable and incredible bust, and fall from grace.
While an admirable gesture and wonderful goal to strive for, you're intelligent enough to know you cannot “put the cart before the horse,” nor force a desired outcome. It would also be contrary to a “free market” economy. You'll recall how strange loans with little to no money down grew to be commonplace. We witnessed how individuals and families, who had little to no ability to pay a mortgage, were being “qualified” - as long as they could fog a mirror - all over this country.
This unhealthy situation was accelerated still further by the lowering of interest rates by the Federal Reserve during the term of Clinton's successor President George W. Bush in response to the events of 9/11/2001.
In the aftermath of the technology bubble that burst in 2000 and the terrorist attack of September 11, 2001, the Federal Reserve lowered the Federal funds rate to 1% and kept it there until June 2004. This allowed a housing bubble to develop in the United States…. Taken on its own the United States housing bubble faithfully followed the course prescribed for it by my boom- bust model. Th
ere was a prevailing trend -- ever more aggressive relaxation of lending standards and expansion of loan to value ratios -- and it was supported by a prevailing misconception that the value of the collateral was not affected by the willingness to lend. That is the most common misconception that has fueled bubbles in the past, particularly in the real estate area. [xxx]
By 2008, 1 in 10 American homeowners had already defaulted on their mortgage or lost their homes in foreclosure; 4 in 10 owed more on their home than it was worth. [xxxi]
The demographic trends … have been projecting a marked slowing in [housing] growth after 2003 and a broader peak in housing demand by 2011 with a much larger drop to follow in demand and prices. [xxxii]
Areas in the United States that enjoyed the largest upward surge in housing prices in the recent bubble years were the first to feel the correction. As the housing decline has continued, those areas with the biggest price gains, previously, have also registered the biggest declines. You probably already know and understand why things worked out this way.
“The New Yorker” magazine in an article by John Cassidy on February 4, 2008, entitled “The Minsky Moment” for Economist Hyman P. Minsky’s writings of 25 years before about over-indebted persons having to sell assets to pay back loans, wrote, as follows:
According to Dean Baker, the co-director of the Center for Economic and Policy Research, average house prices are falling nationwide at an annual rate of more than ten per cent, something not seen since before the Second World War. This means that American households are getting poorer at a rate of more than two trillion dollars a year.
Other writers are singing a similar song, as follows:
What screams ‘bubble,’ giant historic bubble, in real estate is the system-wide extension of massive amounts of credit to finance property purchases … When prices begin to fall, lenders will experience a rising number of defaults on the mortgages they hold. [xxxiii]
America's Worst Economic Depression Page 2
