The Illusion of the Bush Economy's Growth is Revealed
Ever since I have been writing about the economy (about 4 years) I have focused on the mammoth increase in US debt during this expansion. It has led me to question the underlying vitality of this expansion as a whole. Events of the last six months indicate the markets are also asking the same question right now, although in a somewhat different way.
In effect, the economic dominoes are starting to fall. Ultra-low interest rates which inflated asset prices and allowed an explosion of debt are starting to seriously bite as a financial system is burdened with too much bad debt on its books. In addition, the market is starting to realize that asset prices -- namely housing -- were ephemeral and will have to drop. In effect, the entire economy is going through a process of reevaluating "the greatest story never told" and are discovering it wasn't that good a deal to begin with.
Let's start with a few basic charts.
Above is a chart from of total household debt. Notice the curve is almost parabolic over the last few years -- and especially this expansion.
Above is a 10 year chart of household debt. Notice it has increased from about $8 trillion to a little under $14 trillion, which is a really big increase.
As a result of this increase in total household debt outstanding, the householed debt payment ratio has increased to the highest level in 25 years.
Let's place the household debt level in perspective. Here is a chart tabulated every 5 years of total household debt outstanding and its percentage of GDP and total disposable income. The GDP and disposable income numbers are from the Bureau of Economic Analysis and the household debt numbers are from the Federal Reserve's Flow of Funds Report. The figures for 2007 are for the third quarter.
Notice that both percentages jumped sharply during this expansion. This is what easy credit will do for you.
Now -- this massive debt orgy has allowed the US to inflate its home prices.
This has allowed Americans to extract home equity loans from their homes to buy more stuff. Because home prices increased so much in value, Americans felt richer, so they felt as though they could spend more.
Now, I'm not alone in questioning this expansion. Business Week has an article titled, How Real Was the Prosperity?" where they ask the same question.
Consumer Spending: The rule for a prudent individual is simple: Don't spend more than you make. For a long time, the U.S. economy obeyed that rule. As far back as the 1960s, personal spending, adjusted for inflation, has basically tracked the overall growth of the economy, as measured by gross domestic product. Sometimes consumers would get ahead of the economy for a few years, and sometimes fall behind, but never for very long.
That pattern changed in the 1990s. As of the third quarter of 2007, the 10-year growth rate for consumption was 3.6%, vs. GDP growth for the same period of 2.9%. This difference represents an enormous gap. If consumer spending had tracked the overall economy over the past decade as it has in the past, Americans today would be spending about $600 billion less a year. The extra spending has amounted to a total of about $3 trillion since 2001.Consumer Lending. The past 10 years will go down as one of the greatest consumer-lending sprees ever. Adjusted for inflation, consumer debt--including mortgages--rose an average 7.5% per year since 1997, far faster than the 4.2% rate of the previous 10 years. The last time debt rose so fast was the 1960s, as the postwar generation bought homes and autos. If Americans had kept borrowing at their pre-1997 pace, they would have had about $3 trillion less in debt.
Corporate Earnings. Yes, there's been a profit boom in recent years. Corporate earnings, as measured by government statisticians, have averaged 8% of GDP over the past decade, up from a low of 6.5% in the early '90s. That has helped propel stocks upward.
But here's an unfortunate truth--the profit surge has been mainly in one area, financial services. Financial institutions have benefited from the consumer credit boom, the proliferation of new financial instruments, and relatively low rates. By contrast, the earnings of nonfinancial companies over the past decade have averaged about 5.3% of GDP, about the same since the mid-1980s. There are few signs of any acceleration, even after years of restructuring.
Right now we're just starting to deal with the hangover from this debt orgy. The entire financial sector has been wracked by writedowns for the last 6 months. No one has been spared. Estimates are for total writedowns of $300-$500 billion. So far, we've only had $100 billion or so, so we have a ways to go.
We just had the weakest holiday season of the last 5 years, indicating consumers are starting to get tapped out -- they can literally borrow no more. While it is never a good idea to bet against the American consumer who will sell his mother to buy the next thing, high gas and food prices, a tanking housing and stock market and a weakening job market will undoubtedly provide some serious headwinds for the foreseeable future.
Consumer lending is going through the wringer right now as well -- and for good reason. It use to be that all you needed to get a loan was a pulse. Now you actually have to have a credit score.
But the central problem of this expansion is all of that debt has to go somewhere. You can't just slice and dice a pool of debt into many pieces and completely eliminate risk; that just can't be done. But everyone thought you could do it, which is basically how we got into this mess in the first place. Now everyone has the pleasure of choking on a ton of bad loans. And it's not going to stop anytime soon.
To make matters worse, the level of debt in the economy assumes a certain asset value. For example, if a banker makes a $100,000 loan for a $100,000 house and the home starts to decrease in value, the banker will at some time have to writedown the value of the loan. So as home prices decrease anyone who owns mortgage related debt (and that is literally everyone on the planet) will have to writedown the value of their debt. This constrains their ability to make new loans, which hurts an economy like the US which depends on credit creation.
That's the central point to the Business Week article's title. This expansion is based on the inflation of an asset class -- namely, housing. As that asset increased in value, consumers felt wealthier and therefore spent more. They extracted more equity from their homes for more consumer purchases. This was a net positive for consumer spending and the economy as a whole. However, as that asset value decreases -- which is what we are experiencing now -- the exact opposite is also true. Consumers will spend less because they feel less wealthy. And they probably will for some time.
Loading comments…
Want to reply to a comment? Hint: Click "Reply" at the bottom of the comment; after being approved your comment will appear directly underneath the comment you replied to
It always makes me scratch my head to see articles continue to tout this supposed enormous impact that any given president has on the economy.
I mean, sure, the president has more sway than you or me. He can badger the Fed and he can sign/veto tax legislation (cutting or raising) and he has a bully pulpit in general to get his two cents in about economic issues. Those things are significant but not a major factor.
The economy of the US is very large and complicated and therefore to many, many influences.
Clinton happened to be in office during advent of the commercialization of the internet that gave a huge spark to the economy. Also the economy of the early 90's was racked by a business cycle recession. I don't see where Clinton had much to do with that. On hindsight, it was probably ill advised for the FED to have reduced rates mas much as they did from 2001 to 2004. The president does not control the FED directly so you cannot lay their moves totally at Bush's doorstep.
At the end of the day, the president is just one guy. I think you guys attribute too much influence over the economy to the president.
The very real fact that is always missed is that those people in power that control the economy would, in fact, fail miserably if forced to truly operate businesses on their own without help.
This is who we put our faith in?
Rising home values and increased borrowing should have prompted the Fed to turn off the spigot a couple of years ago, but they let it continue. In doing so they enabled Bush to crow about the vitality of "trickle down economics", continued tax cuts for the rich and gutting domestic spending programs. The Fed also gave him a much freer hand in financing / expanding the war. Now the multiple sins of record deficits, poor credit, a compromised tax base, depleted military and destabilized energy prices are coming home to roost. Reagan's "voodoo economics" demonstrate that indeed the emperor may have no clothes. Although we are perhaps too pessimistic, Bush's incompetent legacy is sure to compromise the effectiveness of any new administration for years to come.
Yes, the economy is correcting itself, but still there has been significant real growth. I notice you did not show a graph of the stock market. This is not as bad as the crash at the end of the Clinton Administration. The Clinton Economy was a bigger myth, but the Media treat the two myths VERY differently. For the real story read here:
http://www.leeroyfdermit.com/2007/08/article-today-in-associated-press-said.html
You also have the problem of falling incomes.
Wages, for those who still have jobs, are not keeping up with inflation, even with the mickey-mouse numbers the current administration admits to, and are, in fact, actively contracting.
As incomes fall, debt as a percentage of income increases even with no actual increase in debt.
As much as I hate to quote the Bible, but isn't this stimulus package a bit of "Give a man a fish and he eats for a day, but teach a man to fish and he'll eat for life" (or whatever the exact quote is). Why not a plan that would create jobs? Somebody already suggested it, but why not some massive infrastructure maintanance spending? That'll have way more long term effect than a one-time tax refund.
And why can't anyone ever point out that fatal flaw in "Trickle down economics" - That 100 people making 60,000 a year will always spend more money into the economy than one person making 6,000,000? That tax cuts on those 100 people will generate more spending than a tax cut for that one person.
So Mr Stewart,
Correct me if Im wrong but wont dropping interests rates by 2% just make things worse? I mean seriously what is $800 in the pocket going to change exactly?
Are they not just delaying the inevitable recession( depression)?
Cutting Taxes - Republican code for we'll charge "fees" on the poor people and we'll borrow from the nation's credit card as if there is no limit!
Well upon reading the various responses I believe the score is:
Fiscal Responsibility 217 - Bush & American Consumers 0
The most amazing item is the talking heads on news and business programs and their take on the economy. They continually talk about consumer spending and home valuations. Usually its consumer spending won’t recover until home prices stabilize. Or, falling house prices are negatively impacting consumer spending. What are they thinking! Has borrowing against your home become everyone’s second Job? Has debt piled on debt become normal? The whole mindset is keep borrowing, there’s still untapped equity! All of the economic pundents interrelate spending and home valuations with a straight face. It’s insane, the inmates are running the asylum!
Worse, the only Federal Deficit numbers recited by everyone are the factious ones that exclude the off balance sheet War costs and include the Social Security Surpluses. Thus the 163 billion dollar deficit for 2007 was actually over 500 billion dollars. The “stimulus” package will add at least 150 billion and a slowdown will reduce revenues. The total REAL deficit for 2008 could approach 800 billion dollars. No one is talking about this.
Worser, the “stimulus” package itself. The proposals thus far are more borrow and spend, more non productive tax cuts, more Political vote buying, more special interests pandering, Bush , Hillary, Pelosi, Reid, all of them, gutless, clueless, mindless and useless. Throw in Bernanke’s rate cuts and bank bailouts and they may have come up with the ultimate economic spiral of death plan.
Jaime O'Neill —
How to ruin a perfectly good country.
…Trivialize news and information until reporting about the activities of minor entertainment figures is equal to reporting about the decisions that are affecting the lives of the citizenry….
…Always manipulate the language, affixing labels to those who oppose your policies, repeating those labels in negative contexts until each of them retains the power to convey evil or harm simply by invoking them…
…The biggest bull in the herd of sacred cows is the military. Bolster that bull and gild that sacred cow. The gilding of the military begins and ends with the image of the foot soldier, the grunt, the G.I. Once "our boys," or "our brave men and women in uniform" have been properly gilded and enshrined, it is imperative that you associate yourself with those soldiers in every way you can, always taking pains to blur the distinction between the soldiers and the politicians who have put them at risk. One way to accomplish this blurring is by highly publicized behind-the-lines visits to media-friendly sites where you can be photographed sharing a safe meal with soldiers before hastening back to the nation's capital.
…Export jobs; import goods; borrow heavily from unreliable allies and trading partners. Ensure the indebtedness of future generations. Balance no budgets, but pass on the costs of war profiteering and government contracted waste to the children and grandchildren of the taxpaying classes. Spend taxpayer money as if there's no tomorrow, and live accordingly...
As always, Hale has provided a very concise assessment of a very complicated economic picture. While Hale, and other economic analyst' have been demonstrating the perilous course that our economy has been traveling for the past few years, it is worth noting here that the Bush (mis)administration and its minions have been touting the "economic growth" of the past few years as proof positive that everything was "a-okay" with our economy. As many have pointed out here, it was all "smoke and mirrors"! Funny, isn't it? As recently as last month (just prior to his "middle-east success tour", Mr. Bush was telling America how "solid" our economy was, in response to the observations of many citizens that they were getting crushed.
Now, the "failed businessman", "failed Commander-in-Chief", "failed world leader", "failed deciderer", HAS A PLAN to avert the pending financial disaster!
Yeah Right! I expect it to work!
My point here is this:
If it comes out of G.W.'s mouth, you can count on two certainties; It is either a LIE, or a very bad idea!
The American People should be looking anywhere but the White House and the (DLC) Congress for a solution!
You allowed yourselves to be ruled by GANGSTERS: what did you expect?
(Partial, fat-trimmed reprint, edited...)
One thing NOT reflected in Hale's excellent post is whether consumers pulled home equity out to INVEST, rather than CONSUME. Personally, I would be happy to take on a bigger mortgage (at 6% or so) and plunk the excess in Fidelity (earning 8-11% or so). That's not irresponsible debt -- corporatists call it "leverage."
I am curious how to reconcile household debt going up in 2007, yet household debt as a percent of disposable income dips. Huh? Did our disposable income go UP?
Last: No discussion of a debt-driven bubble economy can be complete without emphasis on the NATIONAL debt -- or the war and irresponsible [aka debt-bloating] tax cuts which drive same.
From top to bottom, this is a credit card, screw-the-grandkids, economy.
DollarPesos, and rat sandwiches...
Maybe this has been brought up and I blinked that millisecond. But why is it when talking about consumer debt and the feds lowering interest rates it isn't mentioned that these cuts usually will not make one iota of difference to credit card interest rates? Or better yet, why doesn't it?
You must be logged in to comment. Log in or connect with
