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According to research, sectors of the
American economy are building to a bubble of parallel and possibly larger scope
than the conditions preceding the 2008 financial crisis. Photograph: Tony
O'Brien/Action Images
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The coming 'tsunami of debt' and financial crisis in America
Forces that caused
the world economy to collapse, including income inequality and debt, are again
in action, and could drag corporations down in their wake
Dimitri
Papadimitriou
Sunday 15 June 2014 / http://www.theguardian.com/money/2014/jun/15/us-economy-bubble-debt-financial-crisis-corporations
The US Congressional Budget Office is
projecting a continued economic recovery. So why look down the road – say, to
2017 – and worry?
Here's why: because the debt held by
American households is rising ominously. And unless our economic policies
change, that debt balloon, powered by radical income inequality, is going to
become the next bust.
Our macro models at the Levy Economics
Institute are showing that the US
What's emerging is a new sort of
speculative bubble, this time based on consumer and corporate credit.
Right now, America
It will have to be driven by spending. Even
a limping recovery like the one we're nursing along today depends on domestic
demand – consumer spending not just by the wealthy, but by everyone else.
We believe that Americans will keep
consuming at the same ever-rising rates of past decades, during good times and
bad. But for the vast majority, wages and wealth aren't going up, so we're
anticipating that the majority of Americans – the 90% – will once again do what
was done before: borrow, and then borrow more.
By early 2017, with growth likely to stall
even according to CBO predictions, it should be apparent that we're reliving an
alarming history. Middle- and low-income households have been following a
trajectory of an ever-higher ratio of debt to income. That same ratio has been
decreasing for the most well-off 10%, who are continuing to see debt decline
and wealth rise.
Why is the relationship between the debt of
the 90% and the gains of the 10% so significant?
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Forces that prompted Occupy movements
protesting income inequality and financial misconduct are again in action,
according to research. Photograph: Spencer Platt/Getty Images
The evidence demonstrates that the
de-leveraging of the very rich and the indebtedness of almost everyone else
move in tandem; they follow the same trend line.
In short, there's a strong and continuous
correlation between the rich getting richer, and the poor – make that the 90% –
going deeper into debt.
That the share of income and wealth to the
richest has skyrocketed is certainly not a new revelation. The heralded data
tabulations of Thomas Piketty and Emmanuel Saez have demonstrated just how
spectacular the plutocrats' portion became in the run-up to the Great
Recession. They codified the belief that no one else can ever catch up with the
very wealthiest.
One important explanation for that
consolidation of wealth emerged from our latest research: The more –
proportionally – that the top 10% has prospered, saved and invested (naturally,
the gains found their way into the financial markets), the more the bottom 90%
has borrowed.
Look at the record of how these phenomena
have travelled in lockstep. In the first three decades after the second world
war, the income of the 90% rose at the same pace as its consumption. But after
the mid-1970s, a gap formed – the trend lines on earning and outlays spread
apart. Spending continued apace. Real income, meanwhile, stagnated. It was
lower in 2012 than it had been forty years earlier. That ever-increasing gap
between income and consumption has been filled by borrowing.
These were the debt dynamics in the lead-up
to the recession. But they are also the dynamics leading out of the crisis, and
continuing today with no end in sight.
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In less than 30 years the richest 20%
became twice as wealthy. Photograph: Jan Butchofsky-Houser/Corbis
Before and after the crash, the fortunes of
the most fortunate sped upward. Between 1983 and 2010, for example, the richest
20% increased in wealth by 100%. But their proportion of debt to wealth fell.
The bottom 40%, meanwhile, lost 270% in
wealth.
It was much applauded when households began
to rapidly pay down debt after 2007. And yet, despite this, their debt to
equity ratio actually rose. With incomes plunging and the value of their assets
– notably, housing – in a free-fall, they couldn't de-leverage fast enough.
Debt outpaced everything else.
Insolvency for the 90% – the overwhelming
majority of Americans – has become, in the decade's catch phrase, "the new
normal". Unsustainable? Of course.
The debt picture is also changing
dramatically for corporations. Historically, the private sector, which often
goes by the moniker Corporate America, had not, overall, been borrowers. They
increased their revenues far more than they borrowed money. Their net lending
was exceptionally low, hovering at around 4% of GDP between 1960 and the mid
1990s.
After the crisis, corporations, like
households, pulled way back on borrowing. But, also like households, they are
now increasing their debt. The steep rise began for non-financial corporations
in 2010 (for families and individuals, debt levels began to go upwards again in
2013). We think these businesses will add another $4tn of debt between now and
2017.
Under the current disastrous economic and
tax policies, we can look forward to rapid increases in debt for both
corporations and households from at least 2015 to 2017: a tsunami of debt.
Alternatively, a teeth-gritting brake on
household and corporate spending would be no help at all.
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Corporations are increasing their debt in
the same way households did before the 2008 crisis, which left many families
homeless and erecting tent cities, like this one in Sacramento
That's because if levels of debt and
consumer consumption go down, the nation would move into what's called secular
stagnation: anemic growth, if any, and higher unemployment. The CBO projections
for growth can't possibly be met unless Americans take on massive liabilities,
piling debt upon debt. Without debt accumulation, there wouldn't be enough
demand – spending – to keep the economy moving.
To paraphrase Voltaire's words on God, even
if bubbles and debt did not exist, it would be necessary to invent them. And
that is exactly what we are doing.
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