Today’s New York Times reports on the growing concern over consumer debt, which has climbed from $54,000 in 1990 to $79,000 last year. Mortgage foreclosures, credit card delinquencies and personal bankruptcies are all at near record levels.
Greenspan’s view is that household balance sheets are “in good shape,” and perhaps stronger than ever, because the value of people’s homes and stock portfolios have risen faster than their debts. He is equally sanguine about the nation’s overall borrowing from foreigners, which has soared to more than $500 billion a year and has contributed to a sharp drop in the value of the dollar. “History suggests that the odds are favorable that current imbalances will be defused with little disruption,” he declared in a speech two weeks ago.
But a growing number of experts are worried that Mr. Greenspan is too casual. Though most economists agree that American’s indebtedness is not a problem at the moment, many worry that the country has become too dependent on extraordinarily low interest rates that will inevitably creep higher in years to come.
“The fear I have is that the world is leveraged on low-interest borrowing,” said Allen Sinai, chief executive of Decision Economics, an economic forecasting firm. “It’s like a drug, and you get hooked on it.”
“The day of reckoning is not now, but maybe five years from now,” said James W. Paulsen, chief investment strategist at Wells Capital Management. “To go down Greenspan’s route is like saying there is a free lunch. The fallacy is that net worth has gone up because debt went up. And that doesn’t give me a good feeling.”
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So what does the little guy do to prepare for this day of reckoning? Get out of debt (of course). But what else? How does he deal with a falling dollar and interest rates that will be raising soon. If he doesn’t plan on borrowing, does he care if interest rates rise (besides a better savings account)?
When he says that “the world is leveraged on low-interest borrowing” does he mean that economic plans are made that require low interest borrowing in the future otherwise they fall apart?
Is the $54 to $79k figure in constant 1990 dollars?
- Josh
Dave,
The other option for the little guy is that he should get *into* debt, so long as it is offered at a fixed rate. Someone who gets a 30 year fixed rate mortgage at 6% will be laughing all the way to the bank (if they hold onto the property).
A risk to doing that is “Predatory Debtor” laws that Congress will pass at the behest of the banks and GSEs holding the other side of these mortgages, a legalized contract violation that will convert a fixed rate to a ‘fairer’ variable rate.
But the odds of that are probably a little less slim than them abolishing or garnishing tax-sheltered retirement accounts and using the one-time windfall to bail out SS.
I don’t expect there to be any escape from this mess so long as theft is legal and expansionary.
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