Re: Consumer Spending [CITS Debt Watch supplement]

Walter Hart wrote [on federal-debts@topica.com]:
> 
> I found this article interesting.
> 

"Why Americans Must Keep Spending" by LOUIS UCHITELLE, New
York Times (December 1, 2003)

http://www.nytimes.com/2003/12/01/business/01econ.html?ex=1070946000&en=6eb815c7c31192d7&ei=5062&partner=GOOGLE

Walter,

Indeed, thanks!

Here's the real scary part:

  Still, while consumer debt, including mortgages, is at a record level  
  -- approaching $8 trillion, according to the Federal Reserve -- the    
  monthly repayment at nearly 14 percent of disposable income is         
  manageable, according to Edward McKelvey, a senior economist at        
  Goldman Sachs. The Federal Reserve's "financial obligations ratio,"    
  which includes debt service as well as rent, auto leases, property     
  taxes and homeowner insurance, comes in at 18 percent of disposable    
  income. Both measures are at near-record levels, but not so high as to 
  inhibit spending, thanks mainly to low interest rates.

Now, look at:

http://progressivetrail.org/articles/031205Weller.shtml

  Household income has not grown fast enough to keep pace with
  consumption needs. Rising costs for education, brought to the American
  family thanks to state fiscal crises, and higher costs for medical
  care, among other things, have required households to borrow more to
  make ends meet as their incomes grew only slowly. By the middle of
  2003, households had amassed an unprecedented 115 percent of their
  disposable income in debt. Consequently, the share of household
  disposable income that was dedicated to repaying debt in the second
  quarter of 2003 was close to a record high for the past 23 years,
  despite record low interest rates. 

So, what do we really have?

We have a point where we are at a historical high in
debt service costs -- at the same time we have a
near historic low in interest rates.

Is there slack for anything to go wrong?  Do extremes
portend good things?

Or explain this.  How can fast rising gold prices (an
expression of fear among many) be accompanied by
a fast rising US stock market, and a rising Euro against the
dollar (where our lowered interest rates should be INCREASING
the demand for the dollar, so the dollar should be climbing
in price relative to the Euro)?

All these simply CANNOT be simultaneously true.  One or
more camps must be wrong.

Let's look at it this way.  Almost all the 8% rise in
US GDP for the quarter was debt-financed.  Now, let's
say this continues, so we get 8 x 4 or a 32% increase
in the GDP for the year (roughly).

If that happens, and the widening profits of DOW component
companies keeps increasing, that means the DOW is
highly undervalued.

That is, if, it weren't built on the quicksand of
higher and higher debt.  If a person kited checks
like this, we'd lock them up!

As the NYT's article notes, the Feds now have
Americans at $8 trillion in debt in a $10 trillion
economy.  I have previously published a debt
summary, for example, here:

http://groups.google.com/groups?selm=3C0CE330.44C2%40mit.edu

We're kidding ourselves if we really think this
economy is in recovery.  And the FRB, not wishing to
make the 1930 mistake of raising interest rates, has
made the 2003 mistake of pushing them artificially low,
causing an even greater wave of more debt, before the fall.

All other things being equal, it should make for a
depression the likes of which NO ONE has ever seen.

Regards,

Curtiss Priest, Ph.D.
Editor, CITS Debt Watch
Member, AEA
-- 


           W. Curtiss Priest, Director, CITS
   Research Affiliate, Comparative Media Studies, MIT
      Center for Information, Technology & Society
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