Runaway Debt?

The chart shows the runaway debt party that we in America have been enjoying since 1985. We have been partying like the 80′s since the 80′s and many did not and do not know that. The 2008 financial crisis was a wake up call.

Nevertheless, investment ‘experts’ have been advising the unwary that everything is OK now. They have been preaching a bull market in stocks since last spring. Undeed we have had an impressive rally for those brave souls who did some bottom fishing, but now it may be time to take profits. The fundamentals of debt as shown above have not improved, but in fact have gotten worse.

The chart shows that our 25 year rally that ended in 2007 was fueled to a great degree by a debt explosion as measured by GDP and easy credit. It is possible that the financial powers that be can keep the music playing for years to come. Establishment economists can make plausible sounding arguments that this will indeed be the case. That another great bull market is underway, but perhaps a dose of common sense is in order.

Low interest rates, and easy money have been with us for decades. Perhaps there is no more multiplier effect.

Think of your household as a mini proxy for GDP. For 25 years you did well. Your home appreciated in value, your paycheck grew, your retirement savings grew, and of course at the same time your debt grew. Now after years of borrowing and spending and perhaps not much savings you are maxed. Your lenders are refusing more credit having had a dose of their own financial discipline. However, the fed and government have not removed the punchbowl from the party table. In fact they are saying, hit it again. Party on.

The line of borrowing represented in the chart above cannot continue in perpetuity. Nothing goes up forever. The adjustment, when it comes, may not be pretty. It is time to be prepared. Thanks to the folks at Corporate Justice blog for putting this out. Click below to visit their site.

Corporate Justice Blog: Runaway Debt?.