US consumers have taken on $14 trillion in debt, which may not seem like a lot, but it is up 137% in a decade. That is what rising housing prices and easy credit will get the economy, a total sum of capital borrowed which cannot ever be paid back.
According to Reuters, "At $14 trillion, the debt load is now roughly equal to the entire economy’s annual output. " A great deal of this money was taken from financial firms for home mortgages, credit cards, and car loans, just the kind of loans people cannot pay back in a recession, especially those poor citizens who have lost their jobs.
The "Catch 22" of the economy as it stands now is that credit has become exceedingly tight and employment has become endangered. Citigroup (C) said it would raise rates on its plastic which may make it more money but will also cause a rise in default rates.
As the economy contracts, the relationship of debt to GDP goes in the wrong direction and, in a period when it would be best to see consumers with cleaner balance sheets, matters deteriorate instead.
If GDP falls at a rate of 5% next year, it will wipe out about two years of gains. In a leveraged society that would cause a default on more than 5% of the consumer debt load. Little capital is coming to the consumer, so little that he may not be able to stay solvent. "Deleveraging", as it is quaintly called, works that way. That would put at least $3 trillion to $4 trillion in debt at risk of default measured against the growth in debt since 2006.
Any analyst or economist looking at these numbers would probably conclude that pushing $700 billion of relief into the current liquidity hole is not sufficient. It would also seem that the $1 trillion in write-offs which financial institutions worldwide have taken due to the credit crisis is only the beginning of a process which will become much more painful and costly
Where will all the money come from to cover these losses? The answer is "no where."
Douglas A. McIntyre.