Chuck Madere Here with a continued report by Michael Hodges

HOUSEHOLD DEBT - soaring to new records - - are many at risk from home equity loans for consumption?

Household debt was $13.8 Trillion in 2007, up $1 Trillion over the prior year.
Of the $13.8 trillion, $10.5 trillion was for mortgages and most of the balance for credit purchases.

The left chart shows the trend of household debt as a share of national income from 1963-today.

Note the left side of the chart - - showing the household debt ratio in the 1960s and early 1970s held steady at about 53% of national income - which means household debt was not growing faster than growth of the total economy.

We recall from Family Income Report charts that prior to 1970 family incomes were rising year after year - but thereafter (debt ratios started zooming upward per this chart) and then family incomes adjusted for inflation ceased to grow, and instead stagnated for the following 30+ years.

Soon after, personal savings peaked and started down.

This chart such suggests real equity & savings have not been the driving force of so-called economic growth - - it has been debt driven.

The left chart shows thereafter the debt ratio then exploded like a rocket - to today’s historic record high debt ratios at 123% of national income (or $13.8 trillion total household debt -  a debt increase of 100% since 2000).

If today’s debt ratio (123% of net national income per this chart) had been the same as in the earlier years on this chart, the chart’s curve would be horizontal instead of soaring upwards, and then today’s debt in dollars would have been $8.9 Trillion less than it was in 2007. In other words, 2007 household debt would have been $4.9 Trillion - - not the $13.8 Trillion that did occur.

This shows that the economy is more leveraged by household debt than ever before.

And, households are even more at the mercy of credit and mortgage rates.

HOUSEHOLD DEBT PER PERSON

The next chart records the trend of inflation-adjusted household debt per man, woman and child (in constant 2005 dollars).

Today’s level of  household debt of $13.8 trillion, up 1 trillion over the prior year, is equivalent to $46,115 per person - a new record.
Equivalent to $184,460 per family of 4.

Note the chart’s upward slope has become steeper and steeper during the past 15 years. This chart shows household debt per person, adjusted for inflation, has increased over 500%.

Other data shows that the move some years ago to home equity loans to cover consumer consumption on credit may be one of the driving forces of this debt explosion - - whereas prior to that time perhaps the higher interest rates of credit cards more restrained household debt expansion than has home equity loans. This suggests that there may be a nation-wide erosion of household equity in homes.

Other data also shows record family debt payments, as a percentage of disposable income. And - personal savings are the lowest in history. And - home equity lowest in history.

The long-term impact on family incomes, shown in graphic form, is in the Family Income Report.
"The U.S. financial system is dependent to an unprecedented degree upon the greatest housing-real estate bubble in human history, led by Fannie Mae. Unless corrective measures are taken, the inevitable collapse and the ensuing devastation will destroy millions of families."-  by Richard Freeman - www.larouchepub.com/other/2002/2924fannie_mae.html

Even students are learning how to go into debt up to their necks. The federal General Accounting Office, according to AP’s Martha Irvin in January 2002, says college students are graduating with an average of $19,400 in student loans. Additionally, average student credit card debt rose 46% from 1998 to 2000, according to the student loan agency Nellie Mae. Meanwhile, universities promote credit cards issued by agencies who kick-back to them.

Auto loans > In addition to soaring home equity mortgages which consume owner stakes in their homes, according to USA Today (2/16/04) the average automobile loan today is for 63 months, with some going as high as 80 months, compared with an average of less than 48 months five years ago - - and about 24 months in the 1950s. In 1997, banks financed an average 89% of a new vehicle’s price. Last year, it was 101% since consumers borrowed to cover the amount they were upside down on their trade-in. And get this…40% of all trade-ins involve upside-down car loans. (this author recalls when he entered the workforce in the late 1950s normal down payment was on-third cash for a car, with 18 month financing for the balance. Quite a contrast to current times.)

Credit Cards > A massive 42% of Americans are making just minimum payments or no payments on their credit card balances, according to the Cambridge Consumer Credit Index in March 2004.  Of those respondents surveyed with revolving balances on their credit cards, 39% made only the minimum payment due and 3% made no payments at all last month. Another 39% paid less than half the balance owed but more than the minimum, while 19% paid more than half their balances.

by Michael Hodges - email
updated June 2008
- a chapter of the Grandfather Economic Reports -

Thank you for reading,

Chuck Madere

Chuck Madere Here with a continued report by Michael Hodges

The author is most concerned with this financial sector debt picture, although I do not fully understand its full makeup and ramifications (see comments below).

But to place this sector in perspective - - Left is a chart showing the main master chart of this chapter for total debt (red line) vs. national income (blue line), that also adds a yellow line to denote the portion of total debt that excludes domestic financial sector debt. The area between the red and yellow lines represents domestic financial sector debt, per federal reserve data.

Although some domestic financial sector debt may also be included in other debt categories, such as repackaging of mortgages (via Fannie Mae), business receivables, etc., most also agree the business debt category understates its own debt, as evidenced by off-balance sheet debts of the likes of Enron, WorldCom, CitiCorp., etc.- - as areas of hidden debt still coming to light and much of that deeply involves the domestic financial sector and is not on business corporate books as it should be.

For example: Numerous areas of ‘hidden’ debt continually come to light - such the debt-freezing of markets in 2007. The Wall Street Journal reported on 7 Sept. 2007: "Though few investors realize it, banks such as Citigroup Inc. could find themselves burdened by affiliated investment vehicles that issue tens of billions of dollars in short-term debt known as commercial paper. The investment vehicles, known as ‘conduits’ and SIVs, are designed to operate separately from the banks and off their balance sheets. One Citigroup SIV is Centauri Corp., which had $21 billion in outstanding debt as of February 2007, according to a Citigroup research report. There is no mention of Centauri in its 2006 annual filing with the Securities and Exchange Commission." On 5 Sept. 2007 the Financial Times reported: “The dislocation in interbank lending stems not just from distrust of rivals’ balance sheets. Banks also have doubts about their own." Bloomberg reported: "Regulators are unable to quantify losses from collateralized debt obligations."

Additionally, the explosion of household debt category does not include increased ratio of auto leases, although such is a form of debt.

Up to and including 1998 the Federal Reserve included the ‘domestic financial sector debt’ in their totals - - since then, they dropped this from their totals. Why they included that sector before in their totals but then changed, is unknown to me, but I continue to keep data methodology for total debt and said trends consistent with the past practices - - less one distorts trends. Therefore, trends of financial sector debt must be included in determining Total Debt (red line on chart), using Federal Reserve data.

The author requests input from those with more knowledge of this sector regarding above comments.

by Michael Hodges - email
updated June 2008
- a chapter of the Grandfather Economic Reports

Thank you for reading,

Chuck Madere

Chuck Madere Here with a continued report by  Michael Hodges.

The left chart shows the trend of federal government debt per man, woman and child - $29,926 per person in of FY2007 - a new record.

NOTE: For full details of federal government debt, with graphics, including interest and debt owed foreigners -

see the Grandfather Federal Government Debt Report.

FINANCIAL SECTOR DEBT - new records each year - exponential

The charts revealed the exponential growth of domestic Financial Sector debt. Let’s look closer at that component.

This chart is a blow-up of the trends of the domestic Financial Sector’s $15.6 trillion of debt shown as a ratio to national income ratio - which, as can be seen by the red-dash line, are growing exponentially upward.

From 1957 to today, the financial sector debt ratios have increased 25 times faster than the economy has grown, including inflation. From 5.6% of the economy’s national income in 1957, to a 140% debt ratio today.

It could be said from this chart that the economy is 25 times more sensitive to Financial sector debt than ever before - - indicating a growing danger of total economic instability.

Much of this explosion is due to exploding government supported enterprises, such as Fannie Mae, Freddie Mac, etc. (see below).

The upward zoom is unbelievable - and worse > it is exponentially upward.

It would appear there is no way this trend is sustainable - - suggesting a major upheaval of some type in the near future. This is said with ‘tongue in cheek.’

Thanks for reading,

Chuck Madere

by Michael Hodges - email
updated June 2008
- a chapter of the Grandfather Economic Reports -

Chuck Madere here bringing you some valueable information  by Michael Hodges that you can use to help you understand our debt situation.

This chart shows the trend of federal government debt (Dept. of Debt data), as a percent of national income.

Note the left part of the chart shows that the debt ratio was heading down from 1957 to 1974. Had that trend continued, the red dash-line shows there should have been zero debt by about 1987.

But, the slope of the downward trend slowed in the late 1960’s, and by 1974 ceased to drop - - oscillated for 10 years - - and then rocketed upward to a historic peace-time record high in 1996.

The reason for the declining debt ratio to stop falling is quite clear. It was due to the fact social spending was climbing many times faster than the economy - as seen in the Grandfather Federal Government Spending Report.

Note the right edge of the chart - - the downward pointing red arrow. That means if today’s debt ratio had been 40% (as it was in 1966-84) of national income, instead of today’s actual ratio of 82% - - today’s debt would be a whopping 4.7 Trillion less than is the case.

It may be worth noting, much of that excess was money siphoned out of the various trust funds (such as from Social Security), and spent on non-pension activities - - without even accounting for this in the budget deficit calculations. As the federal government siphoned off all trust fund surpluses, it left behind non-marketable (worthless) IOUs - - that not even the Federal Reserve counts as market debt - but, the Treasury Dept. properly records it. And, the federal government does not even pay cash interest on that ‘borrowing’ - it just sends over a few more worthless IOUs. All this makes the social security trust fund more vulnerable to disaster - - as the demographic bulge of the baby boom looms very near. The balanced budget plan does not include additional siphoning off of incoming trust fund surpluses, nor does it budget to repay that already siphoned-off. Complete discussion of this is in the Grandfather Trust Fund Report and its companion report with charts.

How often it is heard from politicians that all debt was created in the 1980s. The facts are that half all debt dollars were created in the 1990s - - and, the 1990s (as seen in the chart) have not only rising debt ratio but the highest seen in peace-time - - despite receiving revenue from the 2 largest tax increases in U.S. history.

If politicians want to wrongly camouflage the situation and blame it on the 1980s (which is a falsehood), then they should be willing to reduce today’s debt back to the ratios prior to the 1980s - - say the ratios in the mid-1970s. As seen at the right edge of the chart, the red downward arrow shows all they have to do is to budget spending reductions totaling $4.2 Trillion - - which is more than the entire federal budget. That’s how far we have come.

Thanks for reading

Chuck Madere

by Michael Hodges - email
updated June 2008
- a chapter of the Grandfather Economic Reports -