Our Debt Problem, Explained

[girl gone mad]

Our Debt Problem, Explained
Henry Blodget, http://www.businessinsider.com/henry-blodget-our-de-2009-4">The Business Insider



Government debt has remained at a relatively consistent percentage of GDP for the past 50 years, but the debt of companies, consumers, and financial businesses has soared. The problem now is that the value of the assets that serve as collateral for that debt (houses, stocks, cars, etc.) is plummeting. Thus, the percentage of debt to equity is increasing, and in many areas, the equity is being wiped out.

This is why economists like Paul Krugman, Joseph Stiglitz, and others think Tim Geithner's whole view of the crisis is nuts. We aren't dealing a "temporary mispricing" of debt. We're dealing with the collapse of asset prices that will force the restructuring of trillions of dollars of debt that was loaned against value that no longer exists.

Floyd Norris of the NYT provides a helpful look at the composition of the U.S.'s gigantic debt load. We've blended some of Floyd's stats with the charts from Ned Davis (below) and the FT (above).

http://www.nytimes.com/glogin?URI=http://www.nytimes.com/2009/04/04/business/economy/04charts.html&OQ=_rQ3D2Q26refQ3Dbusiness&OP=8686fe6Q2FkH!Q60kmDh8PDDQ7BQ5BkQ5B__4k_-k_-kQ60W8Q5Eg!88k!hDgDQ25Ak_-hQ26Q3APQ7B8,Q26Q7BQ25o">Floyd's stats:

Consumer debt has finally begun shrinking as a % of GDP

Financial sector debt hasn't.

At the end of 2008 total financial sector debt was $17.2 trillion, or 121% of GDP. At the end of 2007 it was $16 trillion, or only 115% of GDP.

To put this in perspective, in 1958, financial sector debt was $21 billion, only 6% of GDP.


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Household debt (consumers) was $13.8 trillion at the end of both 2007 and 2008. Debt as a % of GDP fell to 97% from 98%.


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Debt of nonfinancial businesses rose earlier in this decade and kept growing last year.


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In 1958, government debt was 60 percent of G.D.P. Half a century later, the proportion was just about the same. It has been exploding recently, obviously.


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In 1958, 75 percent of financial sector debt was on the books of traditional financial institutions — banks, savings and loans and finance companies. Now the proportion is 18 percent.

The rest was securitized. And the securitization markets have collapsed. Which is why folks like Bill Gross say that fixing the banks will only fix a small portion of our overall credit system.

http://www.businessinsider.com/henry-blodget-our-de-2009-4">More...

[fasttense]

1. And why did consumers (mostly middle class and poor people) take on so much debt?

Because their wages and salaries crumbled. To make up for the lack of wages and salaries, they got loans and mortgages. But now consumers have no more collateral to borrow against. So, Wall Street/Bank/Insurance firms will not lend to them because the consumer is all tapped out. The only solution is to raise the consumer's wages. That will create a demand. But instead Geithner pumps money into the supply side.

So why isn't this creating a demand?

Because consumers are not stupid. They know their wages have stagnated and their equity is all used up. I could get a loan tomorrow but I can't find a good paying JOB to pay it off.

[Hugin]

2. Facts back to the top.

:kick:

[Hawkowl]

3. Beautiful explanation

This is a simple, elegant explanation of the problem and Geithner's misdiagnosis and inappropriate plan.