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Extraordinary Popular Debt
By Bill Bonner
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By Bill Bonner
Scroll down the page to view the full article.
Despite the Thatcher and Reagan revolutions…deficits still matter.
Consumer credit came into the world as a simple act of kindness:
“Don’t worry, Mrs. McMurphy, you can pay me next week.”
But consumer credit grew up and debt grew mean. As mentioned in this column
previously, until 1980, total credit market debt in America never exceeded
130% of GDP. Now, it is more than 330%. (What happened in 1980? Ah, more
about that below…) And derivative contracts, based on credit, have grown
even faster. There are now $45 trillion worth of credit default swaps, for
example, up nine-fold in the past three years.
So heavy is the burden of this debt that householders at the bottom of the
financial pyramid are being crushed like Egyptian slaves. “Mortgage
Meltdown,” is easily the most popular headline in the U.S. financial press.
Under its banner, the Chicago Sun-Times reports that there is about one house
in foreclosure on every block of the Windy City. What’s astonishing is that
well-heeled areas are affected too – with foreclosures running 100% ahead of
last year in one middle class neighborhood…and up 193% in an area thought
to be ‘wealthy.’
What has happened? Credit, it turns out, soon reaches the point of
diminishing returns. During the entire period up until 1980, it took about
$1.40 worth of extra credit to produce a single extra dollar of GDP. Since
then, the ratio has deteriorated…with recent figures showing as much as $7
in new credit per additional buck of output.
And now…we seem to have passed the top of the credit cycle – with the
credit industry unwilling to pony up more cash…and output falling. John
Crudele, perhaps jumping the gun, says the U.S. economy may already be in
recession.
Who is the culprit? You could blame central bankers…or the City…or Gordon
Brown and George W. Bush. Or, you could blame the entire human race.
.
.
.
Consumer credit came into the world as a simple act of kindness:
“Don’t worry, Mrs. McMurphy, you can pay me next week.”
But consumer credit grew up and debt grew mean. As mentioned in this column
previously, until 1980, total credit market debt in America never exceeded
130% of GDP. Now, it is more than 330%. (What happened in 1980? Ah, more
about that below…) And derivative contracts, based on credit, have grown
even faster. There are now $45 trillion worth of credit default swaps, for
example, up nine-fold in the past three years.
So heavy is the burden of this debt that householders at the bottom of the
financial pyramid are being crushed like Egyptian slaves. “Mortgage
Meltdown,” is easily the most popular headline in the U.S. financial press.
Under its banner, the Chicago Sun-Times reports that there is about one house
in foreclosure on every block of the Windy City. What’s astonishing is that
well-heeled areas are affected too – with foreclosures running 100% ahead of
last year in one middle class neighborhood…and up 193% in an area thought
to be ‘wealthy.’
What has happened? Credit, it turns out, soon reaches the point of
diminishing returns. During the entire period up until 1980, it took about
$1.40 worth of extra credit to produce a single extra dollar of GDP. Since
then, the ratio has deteriorated…with recent figures showing as much as $7
in new credit per additional buck of output.
And now…we seem to have passed the top of the credit cycle – with the
credit industry unwilling to pony up more cash…and output falling. John
Crudele, perhaps jumping the gun, says the U.S. economy may already be in
recession.
Who is the culprit? You could blame central bankers…or the City…or Gordon
Brown and George W. Bush. Or, you could blame the entire human race.
.
.
.