That is a very pregnant statement. Is it your contention that there is no such thing as being in too much debt? Or are you saying that there is no limit to the measures Americans will take to stay ahead in a loose lending and falling interest rate environment (that encourages debt)? If you mean the second, then I agree. If you mean the first, then you are living in a fantasy world.
==The money supply has grown, wealth has grown, the economy has grown. Of course debt has grown as well. Debt rises secularly whenever IRs are reasonable.
The problem is, household debt has been growing "secularly", and at an exponential rate, ragardless of the interest rate environment.
==Somebody in the piece is indeed a patsy. But the smart ones aren't those taking freshly minted dollars at tiny interest rates and lending all their capital to others, who are reaping much of the rewards of other's savings and other's work.
While we have all been doing what we can to stay ahead in a falling interest rate environment, I think we are all being taken for patsies (Americans and foreigners alike). As I noted in my last post, it is taking ever greater amounts of risk/debt to generate the same amount of national income. This has continued unabated for decades. And, as Pelham has noted, any hint of deflation could topple the house of cards, while loosening credit and expanding the money supply only exacerbates the problem.
Finally, let me give you an idea of how far our economy could fall once the excess debt gets shaken out. And remember, the market almost always over corrects, so take this as a minimum. Jas Jane posed this very question back at the beginning of 2005. Here is his conclusion:
"If you are persuaded that the Household Debt is excessive, based on 450%+ increase in number of Personal Bankruptcy Filings over the past 20 years and many other indicators of debt-distress among households, then the question arises: What will happen to the economy if the Household Debt could not be increased as the % of GDP and at some point it gets back to historical levels?"
"Another way to ask the above question would be: Where would the US GDP be today had the Household Debt, as % of the GDP, remained at the historically high level before the current run up? What if the GDP growth came from growth in the income of households and Household Debt growth that was at 45% of the growth in GDP? The primary reason that I picked the 45% number is that it is the average for 19 years, 1965-1983, and that after 1984 the Personal Bankruptcy Filings exploded. So, we are not talking about a case of no growth in Household Debt; we are simply talking about growth in household spending coming primarily from growth in incomes. Such a GDP would be a Secular GDP with organic growth. As some of you may know, growth in household incomes, in real terms, has been poor over the past 5 years (negative for the last twelve months). How long can debt be a substitute for growth in household spending when income growth is hard to come by?"
"To answer the questions posed in the above paragraph, I decided to recompute the GDP by assuming that the growth in Household Debt was at 45% of the growth in GDP. Further, I assumed that one dollar of additional Household Debt translates to additional dollar of GDP; this I believe to be a conservative number, because it could be closer to $1.5 of GDP growth for each additional dollar of increased Household Debt. Such a recomputed GDP I have termed Secular GDP. Fig. 3 shows graphs of Reported GDP and Secular GDP."
"You will notice that during 1940s and 1950s the Secular GDP was above the Reported GDP, with peak difference at the end of the WW II. Longer term, the Secular GDP has the Pull Effect going forward. Also, you will notice that about half the time, notably 1955-1984, the two graphs are close to each other; this doesn’t prove anything but lends some credence to the methodology employed in arriving at Secular GDP. During most of the Fall and early Winter of the economic Longwave, the red is expected to be above the blue line, but before the Winter could end the blue comes on the top decisively. It will happen again over the next twenty years."
"The wide gulf that has opened up between the red and blue, especially, over the past 5 years, reminds one of the gulf between the Red States and the Blue States in America! Currently, the Secular GDP is 58% of the Reported GDP; this means that the US GDP would have to decline by 42%, in real terms, just to give back the borrowed growth from excessive borrow-and-spend by the households. And thing are likely to be worse than this because the red will fall significantly below the blue before it is fully resolved. This would be Greater Depression in all caps and would lead to massive dislocations of the economies and the governments all over the world."
My question to you you is...WHERE DOES IT ALL END? Can we keep inflating and piling on debt forever? If so, please demonstrate how this is sustainable. If not, what happens when we finally reach the point where we are truly pushing on a string? As the first chart in this post demonstrates, a society with too much debt is extremely vulnerable to market shocks. And we all know, or at least should know, that a highly leveraged society can and will implode, especially when deflation sets in and all those margins come a calling.