If you found the chart featured in my last post alarming, you might be well advised not to have a gander at what Michael Mandel, chief economist at BusinessWeek, is calling "The World's Scariest Chart."
Mandel's chart measures the ratio of U.S. household indebtedness to gross domestic product. And what it shows is that starting around the year 2000, Americans suddenly started piling up debt at a far faster rate than was true during the 1990s. According to Mandel's calculations, the difference between where we are now and where we would have been if we had continued to borrow money at the same pace as in the 1990s adds up to about 25 percent of current U.S. GDP, or roughly $3 trillion. That $3 trillion of extra debt, theorizes Mandel, is one reason why the current financial crisis has been "so hard to solve."
Mandel doesn't offer any reasons for why Americans took Bush's ascension to power as a cue to start borrowing like mad. I'm sure the answer rests in a confluence of many elements. But one factor has to be the easy-money policy of Alan Greenspan. Starting in January 2001, Greenspan orchestrated a series of 13 rate cuts that brought the Federal Funds rate all the way down to 1 percent. Rates didn't begin to rise again until 2004.
Low interest rates equal cheap credit. So the nation went on a great spending binge, an orgy of credit that only now appears to be coming to an end.
But before the necessary hangover -- you know, that miserable headache and nausea that's supposed to remind us that there is a stiff price for wanton self-indulgence -- has even gotten a chance to kick in, the Bernanke Fed has gone on its own rate-cutting rampage. Tuesday's three-quarter of a percentage point cut brought the Fed Funds rate down to 2.25 percent.
Here we go again?
I don't think so. For starters, there's a big difference between now and 2000 -- that extra $3 trillion worth of household debt. When you're already up to your ears in unpaid bills, you might think twice before going to the mall. And when you can't pay your mortgage, are you likely to draw down further on another home equity line of credit? The reason why Michael Mandel is on the money when he calls that household debt-to-GDP chart scary is that the trend line makes inescapably clear the reckoning that must come to pass. That piper must be paid.
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