Wednesday, August 6, 2014

That's how we roll


From The Economic Collapse blog:

The United States Of Debt: Total Debt In America Hits A New Record High Of Nearly 60 Trillion Dollars

By Michael Snyder, on June 15th, 2014

What would you say if I told you that Americans are nearly 60 TRILLION dollars in debt? Well, it is true. When you total up all forms of debt including government debt, business debt, mortgage debt and consumer debt, we are 59.4 trillion dollars in debt...

I know, I know. I'm glad to see the right focus for a change.

Michael Snyder's post is pretty good. He reports a lot of numbers, and he's got a lot of links to back them up. Some of Snyder's stats:

  • total consumer credit in the U.S. has risen by 22 percent over the past three years alone, and at this point 56 percent of all Americans have a subprime credit rating.
  • a newly released survey found that 47 percent of millennials are spending at least half of their paychecks on paying off debt.
  • only 36 percent of all Americans under the age of 35 own a home at this point. That is the lowest level that has ever been recorded.

Snyder's links for these numbers include Time and CNN Money.

I'm not offering Snyder's post as recommended reading, but I'm trying to do the next best thing.


Snyder's post combines evidence and evaluation. His evidence fascinated me because a lot of it was new to me. His evaluation, by contrast, seems lacking. That's okay, that's okay. I can go to Snyder for evidence and Snyder can come to me for evaluation. I've been doing this a long time, and I have a unique perspective on debt.

For me, Snyder's evaluation stands out because it differs so much from mine. He writes

... if you were alive when Jesus Christ was born and you had spent 80 million dollars every single day since then, you still would not have spent 59.4 trillion dollars by now. And most of this debt has been accumulated in recent decades. If you go back 40 years ago, total debt in America was sitting at about 2.2 trillion dollars. Somehow over the past four decades we have allowed the total amount of debt in the United States to get approximately 27 times larger. This is utter insanity, and anyone that thinks this is sustainable is completely deluded. We are living in the greatest debt bubble of all time, and there is no way that this is going to end well.

More than 80 million dollars a day for 2000 years? That's effective imagery. 27 times more now than 40 years ago? That's a striking picture. But then, Snyder writes

Somehow over the past four decades we have allowed the total amount of debt in the United States to get approximately 27 times larger.

Somehow? Man, that's disappointing. We have all this debt because policy demands it. And Snyder writes

there is no way that this is going to end well

but that's a prediction. Nobody knows, really. There are ways to fix the problem. But people who are concerned about debt, people like Michael Snyder, have to come to people like me who are focused on debt and on finding that good ending.


Snyder writes

When the last recession hit, total debt in America actually started going down for a short period of time. But then the Federal Reserve and our politicians in Washington worked feverishly to reinflate the bubble and they assured everyone that everything was going to be just fine. So Americans once again resorted to their free spending ways, and now total debt in the United States is rising at almost the same trajectory as before and has hit a new all-time record high.

See the word "So" there? "So Americans once again resorted to their free spending ways...." That's a conclusion. Michael Snyder concludes that we Americans bought our politicians' reassurances "that everything was going to be just fine", and that's why the borrowing resumed. Do you believe that? I don't believe that. Nobody bought our politicians' reassurances that everything was going to be just fine. Nobody.

How then, I ask, did it happen that we once again resorted to our free spending ways? It happened because the economy is structured that way. That's how we roll.

I have a graph that I show all too often, my debt-per-dollar graph. It displays the ratio of total debt ("government debt, business debt, mortgage debt and consumer debt" as Michael Snyder says) relative to the quantity of money we have readily available for spending (our "spending money" I call it). Why compare debt to spending-money? Because spending-money it what we have to use if we want to pay down debt. Because you can't pay down debt by putting it on the credit card!

As this graph shows, in 1947 there was about $3.50 of debt for every dollar in somebody's pocket, and $3.50 of debt for every dollar in somebody's checking account. $3.50 of debt for every dollar in all the pockets and all the checking accounts in America. But that was in 1947. By 2007, there was about $35 of debt for every dollar in all the pockets and all the checking accounts in America. Ten times as much.

What does this mean? It means that in 1947, for every new dollar of spending-money that came into the economy, you could expect that $3.50 of new debt would be created. Sixty years later, in 2007, for every new dollar of spending-money, you could expect that $35.00 of new debt would be created.

Why did we once again "resort to our free spending ways"? Because the economy is structured that way. Every policy we have is designed to get the most credit use out of every dollar of money we come upon. That's how we roll.

That's the problem. We didn't "somehow" get all this debt. We got all this debt because policy encouraged and supported it. For example, see what Snyder said:

... the Federal Reserve and our politicians in Washington worked feverishly to reinflate the bubble

Yeah, they did.

And why did they do this? Because they think it's what our economy needs. They think it'll get the economy growing again.

And you know what? In my experience on this blog, too many people seem to agree with them. Nobody wants to be prevented from using credit, in case they need to use credit. (I'm not saying anyone should be prevented from using credit. But people jump to conclusion before I can get to the end of a sentence.)

We have to stop implementing policy that encourages people to be in debt, and start implementing policy that encourages us to pay down debt faster than we otherwise would. Tax breaks for accelerated repayment of debt. Call it the Accelerated Repayment Tax, if you like.

I like.

4 comments:

Auburn Parks said...

Great and interesting post.

One point of analysis I'd like to see you tough upon resides in your concept of 'money to debt' ratio.

We need to finish the circle of thought. The debt creates the money. WRT to bank deposits about 99% of all bank deposits exist due to someone else's bank debt, as thats how bank deposits come into being.

So the question becomes, where have all the bank deposits (your 'money') gone?

My personal feeling is that mostly the wealthy have other sorts of debt instruments aka financial assets other than bank deposits en masse. So as income inequality gets worse, regular people have a smaller and smaller amount of bank deposits in their aggregate possession with which to pay back the "debt" which is owned by the wealthy.

I'd like to get your thoughts on this matter

The Arthurian said...

Hi Auburn. You said:
So the question becomes, where have all the bank deposits (your 'money') gone?
My personal feeling is that mostly the wealthy have other sorts of debt instruments aka financial assets other than bank deposits en masse. So as income inequality gets worse, regular people have a smaller and smaller amount of bank deposits in their aggregate possession with which to pay back the "debt" which is owned by the wealthy.


I think your question is exactly the right one to ask. And I think I agree with your answer. I generally say something like too much money has come out of the spending stream and gone into some form of savings. Also our trade deficit drains money from the US economy (but I'm pretty sure the trade deficit arose as a consequence of an earlier problem).

//

You also said:
One point of analysis I'd like to see you tough upon resides in your concept of 'money to debt' ratio.

We need to finish the circle of thought. The debt creates the money. WRT to bank deposits about 99% of all bank deposits exist due to someone else's bank debt, as thats how bank deposits come into being.


I think we are looking at the same thing. I just describe it a little differently: It is not debt that creates money. It is lending and borrowing that create money and debt both. Other people say debt is money or money is debt. I say debt is the record of money borrowed, and debt is a measure of cost that must be repaid. I need to treat money and debt separately because one is an asset and the other is a liability.

Anyhow, you can easily find numbers for money in the spending stream and for debt owed, and the two are nowhere near equal. I'm sure one can find a measure of assets that is very nearly equal to the measure of debt, but that doesn't do anything for me. Consumer spending pretty much sustains the economy, and the money that sustains it is the money people spend. Not the money they save.

Auburn Parks said...

"I need to treat money and debt separately because one is an asset and the other is a liability."

They are both assets and liabilities simultaneously, it just depends on his books you are looking at them on.

Loans are an asset to the bank while simultaneously a liability of the borrower.

Bank deposits (or money in this example) are a liability to the bank while simultaneously an asset of the borrower.

"Anyhow, you can easily find numbers for money in the spending stream"

I don't think M1 is a good measure of the spending stream, after all, its never gone up as fast and as much as it has since 2008 (thanks to QE), and yet we are still mired in a terrible economy.

But I definitely think you are on to something with a "spending stream" concept. I'll have to give this some more thought.

The Arthurian said...

Auburn, a thing can be true but not useful. To my mind, the statement "They are both assets and liabilities simultaneously" is true but not useful.

Separate out what's IN the economy from what's NOT IN the economy. Spending-money is IN... savings is NOT IN.

Debt as a liability is IN... Debt as an assets is NOT IN.

Money in the spending-stream is IN... That same money as liability is NOT IN.

The debt that's IN the economy is a cost. The money that's IN the economy is all we have to make the payments.

Debt as an asset is in the financial economy, not the real economy. Debt as an asset generates income for the financial economy, but for the real economy it only generates cost.

//

I don't think M1 is a good measure of the spending stream, after all, its never gone up as fast and as much as it has since 2008 (thanks to QE), and yet we are still mired in a terrible economy.

Yeah, but "since 2008" is not a viable economy. It's more like what they said in the movie 12 Monkeys, a "permanent emergency".