26 December 2008

Ponzi Nation

America has become more a debt 'junkie' - - than ever before
with total debt of $53 Trillion - - and the highest debt ratio in history.

That's $175,154 per man, woman and child - - or $700,616 per family of 4,
$33,781 more debt per family than last year.

Last year total debt increased $4.3 Trillion, 5.5 times more than GDP.
External debt owed foreign interests increased $2.2 Trillion;
Household, business and financial sector debt soared 7-11%.

80% ($42 trillion) of total debt was created since 1990,
a period primarily driven by debt instead of by productive activity.

And, the above does not include un-funded pensions and medical promises.

America's Total Debt Report - Grandfather's Economic Series

Since a picture is 'worth a 1000 words" here are a few charts for your consideration.

In a simple handwave estimate, one might say that the debt will have to be discounted by at least half. That includes inflation and selective defaults. The seductiveness of this chart is that things have continued on in their frenzied pace for so long, it seems like the norm. That is always a problem with chronic drunks and addicts; they rarely know when to quit, or can't, until they really hit the wall.

Nine out of ten Americans might understand that when the growth of your debt outrageously outstrips your income for so long, that something has got to give. The givers will most likely be all holders of US financial assets, responsible middle class savers, and a disproportionate share of foreign holders of US debt.

While the debtors hold the means of payment in dollars and the power to decide who gets paid, where do you think the most likely impact will be felt?

This is not intended as a rant, a screed in the pejorative sense, or anything else but a reasoned diagnosis based on the data as we find it.

We could be wrong, and we hope we are. Show us better data. The prognosis is not optimistic.

Here is a view of the debt data that is "optimistic" if you are willing to ignore the relative historic context and the huge amount of debts that are off the Federal balance sheet.

A dismissive reaction to this kind of forecast is understandable.

The doctor is always viewed as a 'party pooper' and a gloomy sort when he informs the uber-alpha hard drinking, stress generating, self-medicating, recreational drug=binging forty-something patient that their shortness of breath is emphysema, their blood pressure is soaring as quickly as their self-absorption, and that chest discomfort is a warning sign of a rapidly developing heart problem that could be a deal breaker if they do not change their lifestyle.

But, like most prognostic warnings go, it will be ignored with the dawn of a new day, a successful if awkward commute to work, and the anticipation of another evening's delight and binges yet to come. Until they don't.

It might be a good idea not to be a passenger with a recklessly self-destructive debt junkie at the wheel of your financial assets. Unless you are c0-dependent like Saudi Arabia, China and Japan or are one of the kids in the backseat. Then you have some serious decisions to make.

In the meantime buckle up, because Uncle Sugar-Daddy still has the keys to the car.