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<< Return to The Debt Conundrum Part 1

If there is one chart that tells the tale of the U.S. economic demise, it is the graphic below. It illustrates the transformation of a country that saved and invested to a country that borrowed and spent. In 1981 consumer expenditures accounted for 62% of GDP and private investment accounted for 19% of GDP. Consumer expenditures soared to 70% of GDP while private investment plunged to 11% of GDP. The American economy needs to revert back to the healthier percentages of 1981. Essentially, American households need to spend $1 trillion less per year and use this money to pay down debt and increase savings.

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The Personal Savings rate as a percentage of disposable income dropped below 0% in 2006. Over the last 50 years, the average has been 7.2%. The rate has been below this average since 1992. The rate has recently reached 4% as delusional Boomers are beginning to grasp their bleak future. Boomers always seem to go too far. They will eventually wear the badge of frugality as proudly as they wore the badge of over-consumption. Robert Rodriguez sees an 8% savings rate on the horizon.

“A dramatic rise in the U.S. personal savings rate will be required to begin the mending process of the consumer’s balance sheet. I expect the U.S. personal savings rate will rise from 2% to 8% this year and remain at an elevated level for the foreseeable future. This process should increase savings by approximately $650 billion annually. An increase of this magnitude, in such a brief period, is unprecedented, other than during WW2, when it rose from 12% to 24% between 1941 and 1942. Assuming some earnings on this incremental savings and a partial recovery in the stock and real-estate markets, it will likely take ten years for the consumer’s net worth to return to its pre-crisis level.”

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Anyone anticipating a consumer-led recovery is counting on consumers who have been whacked in the head with a 2 by 4 to stagger to their feet and say, thank you sir may I have another? Even with interest rates at extremely low levels, household debt service is 14% of disposable income, versus the 30 year average of 12.1%. As interest rates rise, this burden will break the consumer’s back. The only way to avoid this fate is a substantial pay down of debt.

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The only difficulty with paying down debt is you need cash to pay it down. For decades, from the 1940s until 2000, Americans were cautious about debt. They always had an emergency fund for those unexpected expenses that always pop up. If your washer broke, a TV crapped out, or your lawn mower stopped working you had the cash on hand to buy a new one. This attitude became passé as we entered a new century. Who needed cash when you received three credit card offers per day in the mail? Today, not only do most Americans not have cash to cover unexpected expenses, they don’t have cash for milk and bread. A vast swath of America pays for their cigarettes, lunch meat, and morning coffee with a credit card. This has resulted in a net $4 trillion deficit of household cash versus household liabilities. Is this normal or abnormal?

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Now that Americans have used up all the equity in their houses, and some, they have turned to their last resort – credit cards. The government has handed billions of taxpayer funds to the biggest credit card issuers in the world (Bank of America, JP Morgan, Citicorp, Wells Fargo, Capital One, and American Express) so they will continue to give grossly overly indebted Americans more rope to hang themselves. This ridiculous solution will destroy the National balance sheet and the people who continue to spend more than they make. We are running up the National credit card balance and passing the bill to future generations. Credit card delinquencies are already at the highest level in history. With 25 million (U6 – 16.4%) people unemployed, out of a work force of 155 million, another 2 to 3 million likely to lose their jobs, house prices still falling, and foreclosures likely to top 2 million in 2009, credit card delinquencies will surge to unprecedented levels in 2010. Does anyone really believe our biggest banks are solvent?

CreditCardDelinquenciesontheRise

The New Normal

“Loading up the nation with debt and leaving it for the following generations to pay is morally irresponsible. To preserve independence, we must not let our rulers load us with perpetual debt.” - Thomas Jefferson

The last three decades have not been normal. They’ve been Abby Normal. When a society chooses to spend more than it produces, the only people who get rich are the bankers lending out the money. For a society to progress, its citizens must save more than they spend. The excess savings can then be utilized to invest in long-term assets that will increase the wealth of the nation. A society needs to produce more than it consumes, or it will eventually wither away. Debt keeps Americans enslaved to the corrupt bankers and clueless government bureaucrats who run our fair country.

"Debt is an ingenious substitute for the chain and whip of the slave driver."- Ambrose Bierce

When this debt binge began in 1982, the profits of financial companies accounted for 7% of all U.S. company profits. At the peak in 2006, they accounted for more than 30% of all U.S. company profits. This is why the money managers own the yachts, not the customers. The banking industry, backed by its sugar daddy the Federal Reserve, has enslaved most of America in their web of debt. They have sucked the vitality and creativity from the nation through the distribution of easy credit. In the last nine years these whoring bankers went completely mad in their greed induced search for outrageous levels of compensation by granting credit to anyone with a breath and creating fraudulent products to perpetuate ever increasing levels of debt. When this blew up in their faces these banks should have gone bankrupt and many bank executives should have gone to jail. Instead, Dr. John Hussman explains what has happened:

“Rather than following policies that would have allowed for a sustainable recovery, our policy makers opted for a stunningly unethical strategy of making bank bondholders whole with well over a trillion dollars in public funds, watering down accounting rules to allow banks to go quietly insolvent while reporting encouraging “operating profits,” looking beyond the continued shortfall of loan loss reserves in relation to loan defaults, and doing nothing meaningful with regard to foreclosures, whose rates continue to soar and which face a fresh wave later this year and well into 2010 and 2011. These policy responses have more than doubled the U.S. monetary base within a period of months, added a trillion more in outstanding Treasury debt, and virtually assure that the value of those government liabilities will be re-priced in relation to goods and services over the coming decade. A range of different methodologies suggest a doubling in U.S. consumer prices over the coming decade, though with the majority of this pressure occurring 3-4 years out and beyond.”

Sometimes I feel like Dr. Frankenstein pointing out to Igor that we need to fix his hump, when I talk about the huge amount of debt on our backs.


Dr. Frederick Frankenstein: You know I'm a rather brilliant surgeon. Perhaps I can help you with that hump.
Igor: What hump?

The current amount of debt accumulated by our citizens and government is mind boggling. We are in a filthy mess. But it is about to get worse. A major storm is on the horizon.

[Frederick and Igor are exhuming a dead criminal]
Dr. Frederick Frankenstein: What a filthy job.
Igor: Could be worse.
Dr. Frederick Frankenstein: How?
Igor: Could be raining.
[It starts to pour]

The $56 trillion of unfunded liabilities for Medicare, Medicaid, and Social Security are a debt that must be paid. This is an unfunded $183,000 debt for every man, woman and child living in the country today. The only way to pay the current and future debts is to increase savings dramatically, reduce consumption dramatically, and increase investment in things that will create real wealth. Real energy self sufficiency projects such as nuclear power plants, coal powered plants, wind farms, natural gas pipelines, liquid natural gas facilities, electrical grid upgrades, replacement of crumbling water and sewer pipes, and upgrading of our public transportation and road networks are what is needed. Is this being done? No. We fiddle while Rome burns. Instead, grand healthcare schemes are being dreamed up that will add trillions more to our crushing debt and the government takes over the car industry. This will end no better than a rear end collision with a Ford Pinto.

The great deniers of our plight assure us that our best and brightest will discover or create some new invention to save the day. Based on the rankings of our 10th graders in math and science, the new discoveries are not likely to occur in this country. We effectively graduate mostly functionally illiterate dullards from our school system every year.

Table on Math & Science Education

The time has come to accept the bitter medicine of a lower standard of living for the foreseeable future. Saving not spending, will save this country. Until most Americans realize the insidious web of debt that they have been trapped into by the poisonous banking cartel, they will never emancipate themselves from their state of slavery. Who is to blame for this catastrophic state of affairs? We the people are. As citizens, if we do not endeavor to exercise control and discipline over our own spending or government spending, who will? Only we can choose to save rather than consume. Only we can elect officials who will spend our tax dollars responsibly. Only we can bring the banking cartel to its knees by not borrowing and no longer accepting less than 1% on our deposits. The choice is ours.

America traditionally represents the greatest possibility of someone's going from nothing to something. Why? In theory, if not practice, the government stays out of the way and lets individuals take risks and reap rewards or accept the consequences of failure. We call this capitalism - or, at least, we used to.” - Larry Elder

Source: The Debt Conundrum, Part 2