In Debt We Trust

One of the common themes from the bullish analysts continues to be, “household balance sheets are much more healthy than they were at the start of the financial crisis.” The data these analysts are using relates only to mortgage debt and the amount of money each month used to service that debt. It does not include rental payments for all those households that can not afford to own a home (or choose not to). It also does not take into account other debt.

Last week the Federal Reserve released their Quarterly Household Debt report. I immediately flipped to the Total Debt Composition chart as it tells the real story of what is happening inside our economy. At the beginning of the year total debt actually surpassed the level from 2008. Yes, mortgage debt is below the peak, but this debt has been replaced by Auto Loans and Student Loans. The difference between mortgage debt and the other debt is barring another collapse in housing prices, those with mortgage debt are at least able to sell the underlying asset if they run into trouble. Auto & Student Loan debt is not as easy to get out of.

Following the government & Federal Reserve’s “solution” to the financial crisis — encouraging even more debt (despite the fact debt, not housing prices collapsing, was the cause of the crisis, we should not be surprised to see households worse off than they were just before the financial crisis began. For 40 years, the current generation of leaders, both personally, as business managers & owners, and politicians have used debt to avoid any sort of short-term pain. How much longer will this go on? The easy answer is, ‘until people stop lending us money.” The harder question to answer is “when will people stop lending us money?” As I’ve said many times, there is not an infinite amount of money in the world willing to constantly lend money to the US simply because there are no other alternatives. Nobody can predict with confidence when that will be, but my experience and study of history tells me that most people will not be able to react until it is too late.