It's the Debt, Stupid

Mark Twain's saying that "history doesn't repeat itself, but it rhymes," might be one of the most abused quotes of the past three years. The quip is grounded in solid logic, but some took its meaning to a faulty level. After most recessions in the past, the economy bounced back quickly. This time, it hasn't. Thus, we must be doing something wrong. "Had the U.S. economy recovered from the current recession the way it bounced back from the other 10 recessions since World War II," wrote former Sen. Phil Gramm in The Wall Street Journal, "11.9 million more Americans would be employed." He called this the "Obama growth discount."

Truth is, the recent recession wasn't like the 10 other recessions since World War II. Most recessions are caused by a little overheating in an otherwise sound economy. Businesses adjust quickly, rehire laid-off workers in the same jobs as before, and things spring back to life.

The recession that started in 2007 was different. It was caused by an inherently unsound economy driven by debt. That dynamic changes everything, as deleveraging is like molasses in an economy's veins. When you find yourself in a debt-driven recession, the result is always the same: a glacially slow recovery. As a McKinsey & Co. report noted, "Historic deleveraging episodes have been painful, on average lasting six to seven years." More money is going toward yesterday's bills, which means less for today's and tomorrow's.

A new study by the Federal Reserve sheds light on how big a role debt plays in our stalling recovery. The study was simple. It ranked the nation's largest 238 counties by the increase in household debt-to-income ratios between 2002 and 2006. It then looked at how each has fared over the past few years.

The results are clear as day. Regions that accumulated the most debt during the boom are in terrible shape, while those that steered clear of it are doing quite well.

For example, auto sales in regions where debt accumulation was the highest are down some 40% since 2005. In regions where debt accumulation was the lowest, sales are actually up about 30%.

Ditto for housing investment. Regions with the lowest debt accumulation have barely seen any dip in residential investment compared with the boom years. Regions where it was the highest have seen construction plunge as much as 60%.

Same for employment. Unemployment rose only slightly in low-debt-accumulation regions during the recession, those job losses peaked early, and jobs have been rebounding for nearly three years. In high-debt regions, jobs fell off a cliff, didn't stop falling until late 2009, and are still around 5% below prerecession levels.

Why did some regions go hog wild with debt while others avoided it? There could be a couple of reasons. The two states that accumulated the most debt are California and Florida, where geography makes it difficult to quickly increase housing supply, pushing up prices faster than in regions like Texas, where you can build as far as the eye can see. There's also a keeping-up-with-the-Joneses effect where legitimately wealthy people inflate the aspirations of the less well-off, enticing the latter to binge on debt just to feel ordinary. "Trickle-down economics may be a chimera, but trickle-down behaviorism is very real," Nobel laureate economist Joseph Stiglitz writes. This is why a 19-year-old barista in Los Angeles feels justified financing a new Mercedes -- something you'll rarely see in, say, North Dakota.

But here's what matters: "The evidence is consistent with the view that problems related to household balance sheets and house prices are the primary culprits of the weak economic recovery," the Fed writes.

That's incredibly important. The recovery isn't slow because of regulation, taxes, health-care reform, or some vague "uncertainty" boogeyman. It's slow because consumers are still deleveraging. And it's not going to get any better until they're done.

When will that happen? The good news is that deleveraging has already taken place in a big way. Household debt payments as a percentage of income have plunged to the lowest level in 15 years, driven largely by refinancing at lower interest rates. Total household debt as a percentage of income has fallen back to early 2004 levels -- down 12% since the peak in 2007. A good chunk of this is thanks to banks like Bank of America (NYSE: BAC  ) , Citigroup (NYSE: C  ) , and Wells Fargo (NYSE: WFC  ) writing off debt. What's painful for banks is often refreshing for consumers.

Some look at the economy's total debt load, including federal debt, and argue that it'll probably be around 2017 before things are back to normal at the rate we're now deleveraging. Since the recession began in earnest in 2009, that would be about eight years of deleveraging.

Which, coincidentally, is exactly what history shows we should expect after a debt-driven recession. So Twain was right: Today is rhyming with history -- if you look at the right history.

Fool contributor Morgan Housel owns B of A preferred. Follow him on Twitter @TMFHousel. The Motley Fool owns shares of Bank of America and Citigroup. The Fool owns shares of and has created a ratio put spread position on Wells Fargo. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


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Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On September 30, 2011, at 3:34 PM, jc09058 wrote:

    Very nice article and very true.

  • Report this Comment On October 01, 2011, at 12:49 PM, slpmn wrote:

    I thought it was a given we're in a deleveraging recession and they take years to correct. Didn't need a Fed study to tell me that.

    So the question is, what can we expect from the financial markets for the next 5-6 years, if that's how long it's going to take to get back to normal? Volatility with no net gain? What sectors do well in this kind of environment? How do commodities do? When does inflation appear? Interest rate trends? Any commonalities there? Those are the kinds of things I would like to know.

  • Report this Comment On October 01, 2011, at 4:52 PM, FutureMonkey wrote:

    .

    The absence of personal finance education for the vast majority of us not only creates individual financial nightmares, but society wide crisis as well as allows politicians the opportunity to propagate nonsense to a willing populace.

    Financial education should start in grade school and junior high, be core in high school along side. Start with a regular reading of Aesops The Ant and the Grasshopper in Kindergarten and go from there.

    FM

  • Report this Comment On October 01, 2011, at 4:58 PM, wolfman225 wrote:

    ^+1 to FM

  • Report this Comment On October 01, 2011, at 5:04 PM, FutureMonkey wrote:

    David,

    I haven't read much Higgs, but it seems to me that one of his main criticisms of Krugman and the liberal economic theory is the rejection of "aggregates" in macro-economic manipulations. A dollar spent on X is Y location is the same as a dollar spent on A in B location.

    "These extraordinarily complex micro-relationships are what we are really referring to when we speak of “the economy.” It is definitely not a single, simple process for producing a uniform, aggregate glop. Moreover, when we speak of “economic action,” we are referring to the choices that millions of diverse participants make in selecting one course of action and setting aside a possible alternative" From Recession and Recovery

    Six Fundamental Errors of the Current Orthodoxy

    March 5, 2009

    I don't see anything in Morgan's article or the Fed report for Higgs would disagree with. Seems to me what Morgan is stating is exactly what Higgs writes about, aggregate evaluation is glop while local choices made by diverse participants have different consequences in different regions of the country. I'm confounded by your attack on Morgan in this instance.

    FM

  • Report this Comment On October 01, 2011, at 5:09 PM, TMFBiggles wrote:

    @ FutureMonkey:

    I remember watching a classic Disney cartoon about the Ant and the Grasshopper as a young lad. I'm not sure it taught me anything about finance, though.

    http://www.youtube.com/watch?v=wM1DgihKHVI

    Moral of the story? If you can play tunes on a fiddle, you don't have to work. Just set yourself up near a bunch of Communists and they'll save you when it gets cold.

  • Report this Comment On October 01, 2011, at 5:09 PM, FutureMonkey wrote:

    Clearly my grammar editor has taken the day off, but my point is financial literacy in America is a disgrace and that Morgan didn't express any ideas in this article that could be even loosly attributed to economic liberalism.

  • Report this Comment On October 01, 2011, at 7:18 PM, JackCaps wrote:

    I believe that Morgan Housel's thesis is... "The recovery isn't slow because of regulation, taxes, health-care reform, or some vague "uncertainty" boogeyman. It's slow because consumers are still deleveraging."

    To test this thesis, examine the DSR (household debt service ratio, an estimate of the ratio of debt payments to disposable personal income - see http://www.federalreserve.gov/releases/housedebt/) over the pst few decades. For 2011 Q2, the last reported quarter, the DSR is 11.09%. The DSR has gone down fairly consistently since peaking at 13.96% for 2007 Q3.

    From 1980 through 1998, the DSR stayed in a range of 10.61% to 12.38%. So the current DSR is already near the low end of that range.

    So the thesis premise is correct, consumers have been de-leveraging.

    But why do consumers still lack confidence now that the DSR is now down to the low end of its pre-2000 range?

    The 2007 recession is distinct from from all other post-WW2 recessions by its anemic employment recovery. (See http://www.ritholtz.com/blog/2010/03/change-in-us-employment... for some nice interactive graphs.) The 2007 had the largest employment rate change from recession start to the official "recovery" date in 2009 at -5.5% and has not improved much since then.

    Consumers are de-leveraging because of fear. They fear job loss and perceive the current employment environment as a threat. Saving instead of spending is a means of reducing that threat.

    So perhaps a title change is in order, like -

    It's the Unemployment, Stupid.

  • Report this Comment On October 02, 2011, at 10:39 AM, gmbmf56 wrote:

    The Fed Res and Wash DC the folks who brought

    us the hyper credit bubble via the housing market.

    Why would we ever accept any of there statistics

    or so called studies.They can't do anything very well

    except waste money . Any regular reader of Barron's

    or the WSJ would find ample info on their flawed data. As to consumer spending and unemployment.

    Both will improve very nicely once small business

    owners are released from the fear of the progressive,anti business,massive government,

    wealth redistribution elitists that are effecting

    all our lives. As for Morgan who I waited until last

    to mention. He sounds like any typical pseudo

    intellectual. He may even be a Krugman wanna

    be. Which means he will mostly be ignored.

  • Report this Comment On October 02, 2011, at 11:16 AM, gladRocks wrote:

    While I agree with the main premise that the problem is over leverage, the writer here has some big holes in his analysis. First, while consumers are paying down debt or otherwise defaulting, our total debt levels aren't really going down yet, because it's basically being transferred to the federal government through our extreme deficit spending. And yes, banks may be forced to right off bad debts but they've been recapitalized by the Federal Reserve as it "prints" money, which has devalued our currency. These "fixes" tend to be what adds the time lag to recovering from a leverage led recession by slowing the bottoming out process. Add to that the other government fixes of Obamacare, onerous bank regulations that have nothing to do with the financial crisis, harassment of traditional energy producers and a woefully inefficient tax system and you cannot help but add to the problem.

    We've had financial panics before. The idea that it has to take 6 years or more to fix is defeatist at best. At worst it's a lame attempt to say, it's not Obama's fault, there was nothing he could have done anyway.

  • Report this Comment On October 02, 2011, at 11:45 AM, TMFHousel wrote:

    <<The writer here has some big holes in his analysis. First, while consumers are paying down debt or otherwise defaulting, our total debt levels aren't really going down yet, because it's basically being transferred to the federal government through our extreme deficit spending>>

    False. Total credit market debt -- private plus public -- has been declining since 2008:

    http://www.fool.com/investing/general/2011/07/08/the-long-sl...

    Also here: http://www.comstockfunds.com/(X(1)S(jbcguj55o2fig2jevqdtka45...

  • Report this Comment On October 02, 2011, at 12:43 PM, whathandkerchief wrote:

    From the link title on Real Clear Markets ("Historically, This Is a Typical De-Leveraging"), I was hoping to find out what a "typical de-leveraging" might be. I'm disappointed.

    I do now know there hasn't been such an animal since WWII and that there's a McKinsey &Co report (somewhere) saying that when the animal shows up (and possibly see its shadow) it means a long recovery. This leads to a puzzlement. The Panic of 1907 looks a lot like the Panic of 2008, but the recovery was complete in a little over 2 years. That leaves the Great Depression. Lonesome. And asking the question, "was I caused by de-leveraging?" You need a few more examples.

    On the bright side, the Stiglitz quote clearly shows crappy argumentation is no bar to winning the Nobel in economics.

  • Report this Comment On October 02, 2011, at 12:48 PM, TMFHousel wrote:

    whathandkerchief,

    RCM comes up with their own link titles. I wouldn't have used it.

  • Report this Comment On October 02, 2011, at 12:56 PM, robwg wrote:

    I didn't join MF for political viewpoints or propaganda. It seems, however, that this is becoming more the norm here, along with an advertising policy that is more worthy of a pump and dump practitioner. This politically slanted article has no place on an investment advice site, and has finally convinced me to cancel my relationship with this company. Goodbye, MF, enjoy your politics and low ethics advertising game, i'm a Fool no more.

  • Report this Comment On October 02, 2011, at 1:08 PM, mudpuppy100 wrote:

    Future Monkey says,

    " I don't see anything in Morgan's article or the Fed report for Higgs would disagree with."

    <a href="http://www.independent.org/newsroom/article.asp?id=2995&quot... This article by Higgs</a> most assuredly disagree vehemently with this statement by the author of this piece,

    "The recovery isn't slow because of regulation, taxes, health-care reform, or some vague "uncertainty" boogeyman."

    Higgs argues explicitly that those are precisely the reasons the recovery is slow.

    I too agree with Higgs.

  • Report this Comment On October 02, 2011, at 1:17 PM, TMFHousel wrote:

    robwg,

    Sorry you're disappointed. To be clear, this article reflects my views, and not anyone else's at TMF. Indeed, many can -- and do -- disagree with me.

  • Report this Comment On October 02, 2011, at 2:43 PM, Bert31 wrote:

    "False. Total credit market debt -- private plus public -- has been declining since 2008:"

    2008- 52,433.8 billion

    2011- 52,644.7 billion

    Does not seem to be declining. Only thing declining is GDP.

    http://www.federalreserve.gov/releases/z1/current/z1r-4.pdf

  • Report this Comment On October 02, 2011, at 2:46 PM, TMFHousel wrote:

    Declining as a % of GDP, which is the appropriate way to view debt statistics.

    And GDP is indeed rising, which is why the ratio has declined.

  • Report this Comment On October 02, 2011, at 2:59 PM, Bert31 wrote:

    You said the the poster was false for saying total debt levels were not going down. He was not false. You can use any ratio you want to try and support your claim but he was not false.

  • Report this Comment On October 02, 2011, at 3:57 PM, TMFHousel wrote:

    Fair enough. If I could go back and switch "false" for "you may want to consider," I would.

    But it's still worth noting that:

    1) Total credit market debt in nominal terms has indeed dropped since early 2009.

    2) It's useless to compare historical figures without adjusting them for inflation/size of the economy. Not doing so would make you conclude that WW2 barely cost anything, and that the average American earns 50% more today than they did ten years ago.

  • Report this Comment On October 02, 2011, at 4:46 PM, dwot wrote:

    I have tons on posts on debt...

    Here's one from my archives...

    http://caps.fool.com/Blogs/dominos-of-debt/29666

  • Report this Comment On October 02, 2011, at 8:14 PM, wantingtoretire wrote:

    But here's what matters: "The evidence is consistent with the view that problems related to household balance sheets and house prices are the primary culprits of the weak economic recovery," the Fed writes.

    This not new. It's just that it is not common knowledge.

    Households are reducing their debt. But to expect households to turnaround and start spending again, as someone mentioned, is laughable.

    House prices are still falling.

    Unemployment is still a fixture on the landscape creating uncertainty.

    The federal government owes a lot of money.

    State governments continue to have difficulty in reaching balanced budgets.

    Some states are bankrupt.

    The consumer of last resort is not going to get the economy back on its feet. Period. The sooner this is realized the easier it will be to understand. The consumer of last resort has no appetite for increasing debt.

    This means that America is in really bad shape and is likely to see deflation. That is the view of of a number of people. It is difficult to see what lies ahead let alone expect "things to be back to normal" by 2017.

  • Report this Comment On October 02, 2011, at 8:47 PM, DaHess wrote:

    The best article about the financial crisis I have ever read so far. Spot-on!

  • Report this Comment On October 02, 2011, at 10:03 PM, TMFTypeoh wrote:

    Great article Morgan!

    If the deleveraging doesn't stop til 2017, do you have any data on what that would mean for employment/stock returns?

  • Report this Comment On October 02, 2011, at 10:32 PM, johnwerneken wrote:

    don't mind being a Fool.

    I'd like some more history on other deleverages

    afaik they are associated with a generational shift in politics, which I expect for many reasons anyway

    Beyond deficit and debt there is also currency worthlessness and the non-financial trade deficit. To undo all of that would take a nation and a leadership that saw it and tried a good long time. How long it will take when both nation and leadership have crania so far up rectums as to require stomach area windshields for visibility, I can not guess, except I am sure it will be even longer.

  • Report this Comment On October 02, 2011, at 10:43 PM, zgriner wrote:

    With a $14,000,000,000,000 debt, 310,000,000 Americans and an average family size of 3.3, the average tax-paying family owes about $250,000 in US DEBT.

    THIS DEBT WILL NEVER BE REPAID. Instead, we will be spending 20% of the budget paying worthless, job-sucking interest forever.

    And the Crook-in-Chief wants to double-down on this debt.

  • Report this Comment On October 02, 2011, at 10:47 PM, mnemos wrote:

    The argument makes a lot of sense to me. In the initial statements you mention an "unsound economy" and I wonder if the debt levels are an adequate description of what is unsound in our economy. As I understand it, the percentage of our GDP which is the "financial sector" is something historically unprecedented. The percentage of GDP recovery which is from the financial sector is also unprecedented. And the recent financial collapse includes bad government decisions but also bad finance sector decisions and financial products which were fundamentally not understood and basically of negative value. If this large percentage of our economy produces no tangible goods and services with negative value, the economy will be unsound regardless of debt levels. I haven't read anything which gives good insight to this yet. Any recommendations/links?

  • Report this Comment On October 02, 2011, at 11:12 PM, mnemos wrote:

    @Morgan - Took a quick look at the article on "long slow death of debt" - didn't seem convincing to me in that I don't see how it accounts for changes in obligation. EG the CLASS Act (which will probably die anyway at this point) which decreases debt by $70B by accepting obligations of several $T - yes the debt number goes down, but it doesn't mean we are really getting finances in order.

  • Report this Comment On October 03, 2011, at 3:29 PM, DomingoMac wrote:

    I agree with the gist of this - i.e., that the necessity of paring back debt loads is going to make this a grinding recovery. But then the author jumps to this unwarranted conclusion and thereby betrays his political agenda: "The recovery isn't slow because of regulation, taxes, health-care reform, or some vague "uncertainty" boogeyman. It's slow because consumers are still deleveraging."

    The best way to liquidate debts would be to grow faster, and regulation, taxes (especially a hugely inefficient tax system such as we have) and, yes, Obamacare are all slowing growth. So are a lot of intangibles coming out of the Obama administration (promoting envy and resentment between classes just gets depressing for everybody eventually).

    Next time, spare us the political soapbox.

  • Report this Comment On October 03, 2011, at 3:33 PM, TMFHousel wrote:

    <<Next time, spare us the political soapbox.>>

    Says the man who just finished a political soapbox.

  • Report this Comment On October 03, 2011, at 6:31 PM, devoish wrote:

    Morgan,

    I kind of agree with the premise of your article, but I do not think you are looking deeply enough. Using debt levels from 1980 - 2007 as normal is not realistic. I think one major difference between now and 1980 - 2000 is in 1980 - 2000 people were borrowing against incomes they could expect to grow, whereas now they are taking pay cuts. In 1980 - 2000 people were borrowing aginst houses that had increased in value, and that they actually owned. The time from 2000 - 2008 was a ponzi scheme in housing, depending upon the greater fool, not the greater income to pay for rising prices. From 1940 - 1980 the increasing income paid for increasing mortgages. Today if you are a thirtyfive year old teacher looking to buy a house, you have to plan on pay reductions, not increases when you figure out how much house you can afford. People are screaming for the easy target of your paycheck, rather than the more difficult target of Hank Paulsons paycheck.

    The issues are political, Government is supporting wealth under the pretentions of the politics of 'freedom' and destroying the middle class. But regardless, you need to find a time period of declining incomes, not increasing income levels, to find where debt levels are 'normal'.

    Stay strong in the face of the character attacks and insults that you are enduring. The political hatchetmen delivering them do not have my respect, and do not deserve yours.

    Best wishes,

    Steven

  • Report this Comment On October 03, 2011, at 6:39 PM, TMFHousel wrote:

    <<I kind of agree with the premise of your article, but I do not think you are looking deeply enough. Using debt levels from 1980 - 2007 as normal is not realistic.>>

    Sorry, where did I do that?

  • Report this Comment On October 03, 2011, at 10:38 PM, devoish wrote:

    Oops.

    I read jackcaps 7:18 reply as yours. Please readdress my post to jackcaps, not Morgan.

    In general I think that comparing post 1940 economics for assessing the liklihood of economic recovery sorely overlooks the fact that there is no middle class without unions, and comparing today to an era that has them is inherently flawed.

    I think that the the 2007 recession is different from the other ten recessions since WW2 because America has surrendered income equality when it surrendered its unions. Lets face it, if you are in the top 10% the economy is fine, you are getting richer as labor such as teachers and cops are geting cheaper for you. If you are in a job that was unionised 30 years ago, but is not today, you are working harder for less, to support that 10%, and the economy is bad for you.

    This is not a debt driven recession, this is an income disparity driven recession. It may have been covered up by borrowing and twenty years of slowly lowering interest rates and refinancing but the debt is a symptom of the deeper problem.

    Best wishes,

    Steven

  • Report this Comment On October 04, 2011, at 10:57 AM, ShaunConnell wrote:

    The question is, what causes the debt? A religious-like faith in college, the desire of young people to have it all right now, the notion that everyone deserves a 2,000 sq foot house, and the fact that over 90% of people in America have TVs and watch them constantly.

    Debt is both a problem and a symptom. You have to earn it before you can pay for it -- that the average American /wants/ easy credit is just as much the problem as the fact that they got it.

    Also, what caused the debt? Hint: easy credit. This recession has its own unique traits, but it's like the other big recessions in the sense that it is based largely on the actions of the debt-addicted Fed.

  • Report this Comment On October 04, 2011, at 3:35 PM, ibuildthings wrote:

    "That's incredibly important. The recovery isn't slow because of regulation, taxes, health-care reform, or some vague "uncertainty" boogeyman. It's slow because consumers are still deleveraging. And it's not going to get any better until they're done."

    ----------------

    There is rarely only one cause to something large. I agree that people who got in over their head with debt are either walking away, leaving the creditors holding the bag, or slowly paying off the bills. Either way, it is a drag on the economy. However, it isn't the only drag.

    Uncertainty is a real influence. I have heard multiple times on Bloomberg's interviews with business leaders that they are waiting to make big decisions until they have more visibility on the tax and regulation structure that affects their businesses. That is uncertainty. That is the same uncertainty that makes some people reluctant to buy shares in a company where they can't feel confident in its continued competitive advantage. The same kind of uncertainty that makes people avoid companies that could be sued out of existence, whether fairly or not.

  • Report this Comment On October 04, 2011, at 10:02 PM, msteg01 wrote:

    Actually lack of opportunity is the problem. When people do not see opportunity then they start investing all their money in stuff like big houses/cars that produce no return for them (i.e. high debt, no income growth that this article refers to)...

    Find ways to increase opportunity for people and these debt issues would go away: It is very different to borrow $1000 to spend on an opportunity to increase income by $500 per year versus borrow $1000 to spend on a bigger house (that requires more upkeep) that produces no return.

  • Report this Comment On October 05, 2011, at 11:28 AM, surfgeezer wrote:

    Read the comments. What is seriously lacking from the political based theories, is an understanding of how the International markets treat debt. In fact what happens to a high debtor Reserve status country is other countries are able to buy debt instead of goods to keep the EXCHANGE RATES where THEY want them.

    This lack of understanding of how capitol flows and trade deficits actually adjust the exchange rates at the fundamental level(yes, given it also is affected by FX market deviations).

    It is NOT understood by most politicians and was in NEITHER Keynes or Austrian models that the parties love to argue over.

    Simple fact is the larger the deficit the more our exchange rate is manipulated by our International competitors. ALL deficits, and yes they are caused by BOTH overspending AND under taxing, MUST be weighed against the hit to the exchange rates.

    Despite the ridiculous arguments that a High relatively valued currency is somehow patriotic, it KILLS the middle class and competitive effectiveness. Have a false discount on others goods with cheaper financing and an matching PREMIUM on our export goods is simply no longer a good trade off or sustainable. It helps consumers,debtors, and the Financial sectors of the GDP and kill manufacturing and Jobs. We simply have had DECADES of slowly moving the mix and are WAY off a sustainable model.

    Do not expect the politician to enlighten people, BOTH side depend on the debt and Keynesian/Austrian debate to stir the electorate.

    International competitiveness IS the key and the tweaks we need to our internal systems are relatively small, BUT we must bring down our debt for the relative value, exchange rate consequences.

  • Report this Comment On October 05, 2011, at 4:33 PM, Junkyardhawg1985 wrote:

    I agree with the premise that the popping of debt/assets bubbles is a different animal than a typical recession. This was true following the debt asset bubbles of 1837, 1893, and 1929.

    I don't agree with the defeatest conclusion that we must wait until 2017 until things will be OK. Our government plan thus far has been to keep trying th inflate the debt level by borrowing huge sums of money. It is within America's ability to speed up the process of deleveraging. Overall, Americans have about $8 trillion in tax preferred accounts (401K, 403B, IRA's). If the government allowed people to transfer money from a 401K to pay directly toward a mortgage or student loan at a flat 15% tax rate without penalty, then I think you would see a huge step down in debt outstanding and the deleveraging process would be quick. This would reduce total debt outstanding while simulatneously reducing government debt. If 20% of the money in pre-tax accounts were used to pay off debt, then debt/GDP would drop by about 10% and the government would net about $240B.

  • Report this Comment On October 07, 2011, at 11:46 AM, JQCitizen wrote:

    If the distribution of income weren't so lopsided, the recovery occur sooner. If the middle class income had not been stagnant since the '80's, there would have been less tapping of home equity and there would be more middle class income to deleverage faster.

  • Report this Comment On October 08, 2011, at 8:54 AM, 1MarbleMissing wrote:

    Sorry TMFBiggles, but I watched your link. Didn't see no communist enclave. What I did see was redemption, repentance, forgiveness, and true charity. Along with a healthy realization all talents needed useful in the appropriate settings. Nothing was given away for free. No support of the idea of anyone being "owed a living". So, I don't think that video really applies.

    I do believe this was a good article, and well worth the time to read. Thank you.

    I also think the comments I've read so far have been very good. Even when I don't agree, they have been disciplined and well mannered. Thank you all for that.

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