The (Rude) Awakening
While satire can be useful in pointing out the folly of America’s unprecedented borrowing and spending binge, the remedy will likely be so harsh that it precludes humor. Yet, the aspect of the effects of this credit phenomenon on the average American has long concerned me. So, with your permission, I will continue the story of the couple above, whom I’ll call Bob and Sally Smith, in my own admittedly dour way. If you are fortunate enough to be reading this article with no credit problems, you still have been, and will be, affected by this historic, reckless expansion of credit. Beyond the effects of inflation, and the probability of deflation, the consequences of our profligacy will not play out in a vacuum and will not be nearly as hygienic as an academic discussion of this problem.
In response to the bursting of the stock market bubble of the late ‘90s, in 2001, the Federal Reserve began slashing interest rates, from 6.5 to 1 percent by 2003, bringing rates to their lowest levels since the Great Depression. Not surprisingly, as the credit spigot was opened wide, housing prices went parabolic. The unsustainable stock prices of the late ‘90s gave way to the unsustainable real estate prices of today. In 2004 and 2005, thousands of articles warned of a real estate bust, but the bust has yet to occur. Over the last two years, like us, many have cautioned that the stock market is again nearing a significant decline, yet no such decline has unfolded.
So, if things have been “good” for so long (three years is forever to most Americans), why do we so doggedly hold to the idea that there is a problem and that our current course is not self-sustaining? I think that we are nearing the end of this present course, and while no person can know that this is “the top” (until it is too late to do anything about it), keeping watch for “the top” has never been more crucial. So once again, this time – through the eyes of Mr. and Mrs. Smith, we will look at the line of dominoes, the first of which is teetering and appears to be starting to fall.
The Smiths have heard stories from friends, family, and associates that are very close to their own experience. One day, Bob recognizes a common denominator and becomes concerned. He realizes that a lot of the people he knows have taken on increasing amounts of debt and ponders whether his small view of the world is a microcosm of what is happening on a much larger scale across the U.S. While they are certainly not “pessimists,” the Smiths decide to do some research on debt, which eventually leads them to a website called, prudentbear.com. There they happen upon the chart below. As they take in the size of household debt and the pace at which it’s growing, and realize that this is not a chart of a few families in their circle of friends, but a look at the 300 million people that comprise the United States, they become increasingly ill at ease.
In response to the bursting of the stock market bubble of the late ‘90s, in 2001, the Federal Reserve began slashing interest rates, from 6.5 to 1 percent by 2003, bringing rates to their lowest levels since the Great Depression. Not surprisingly, as the credit spigot was opened wide, housing prices went parabolic. The unsustainable stock prices of the late ‘90s gave way to the unsustainable real estate prices of today. In 2004 and 2005, thousands of articles warned of a real estate bust, but the bust has yet to occur. Over the last two years, like us, many have cautioned that the stock market is again nearing a significant decline, yet no such decline has unfolded.
So, if things have been “good” for so long (three years is forever to most Americans), why do we so doggedly hold to the idea that there is a problem and that our current course is not self-sustaining? I think that we are nearing the end of this present course, and while no person can know that this is “the top” (until it is too late to do anything about it), keeping watch for “the top” has never been more crucial. So once again, this time – through the eyes of Mr. and Mrs. Smith, we will look at the line of dominoes, the first of which is teetering and appears to be starting to fall.
The Smiths have heard stories from friends, family, and associates that are very close to their own experience. One day, Bob recognizes a common denominator and becomes concerned. He realizes that a lot of the people he knows have taken on increasing amounts of debt and ponders whether his small view of the world is a microcosm of what is happening on a much larger scale across the U.S. While they are certainly not “pessimists,” the Smiths decide to do some research on debt, which eventually leads them to a website called, prudentbear.com. There they happen upon the chart below. As they take in the size of household debt and the pace at which it’s growing, and realize that this is not a chart of a few families in their circle of friends, but a look at the 300 million people that comprise the United States, they become increasingly ill at ease.