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February 28, 2004

A Phoney Recovery

That's not my title but that of an article at the Economist magazine, the economically conservative British weekly.

Their point?

An anemic recovery built on massive federal deficit spending and personal debt derived from inflated house prices is precarious and unsustainable.

As the graph emphasizes, the value of household assets increased dramatically in 2003, yet it wasn't enough to keep net household debt from increasing.

Total household debt increased by more than $900 billion last year, almost twice as much as in 1999. Mr Richebächer claims that America is experiencing the biggest credit bubble in history: total debt (public and private) has increased by a hefty $6.5 trillion since 2000.

Consumers can spend more than they earn by borrowing against their expanding wealth or running down savings, but for how long? If (still a big if) hiring by firms picks up sharply in coming months, pushing up incomes, then consumers will become less reliant on asset appreciation and debt, and the recovery will become more soundly based. Even so, their debts will hang around for a long while.

Note that big "if"-- if employment growth remains anemic, the whole asset bubble could once again collapse, shutting down consumer spending with a massive slam.

Update: Check out this story on the rise of bankruptcies in the US-- "90 percent of the bankruptcy filings this year will be made by middle-class families, including some 9 million American households in divorce - roughly one new filing every five minutes."

An interesting part of the story is that, according to it, it was Hillary who convinced Bill Clinton to veto the nasty bankruptcy law in 2000 that keeps kicking around Congress.

Posted by Nathan at February 28, 2004 07:59 AM

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