"In Montbello and Green Valley Ranch, existing-home values are falling as foreclosures spread. Burned-down houses sit abandoned for a year or more."
"For-sale signs carry notes of desperation. One offers a week-long Caribbean cruise to the buyer of a foreclosed house. `Zero down? Poor credit? First-time buyer? Call for a free two-minute pre-approval,' another urges."
"From August to October, the median sale price on existing homes in Green Valley Ranch was $185,450, down from $201,000 during the same months a year ago. In Montbello, median sale prices dropped from $175,385 to $164,950."
"In Montbello, Bernadette Ukolowicz waited seven months for one lucky knock at her door. Three times she lowered it. Then she took the sign down. When most house sales in your neighborhood are foreclosure-related, it's hard to compete."
"In seven months, six people looked at her three-bedroom house. Nobody has since September. For-sale signs abound on her street. Three houses on her block have been foreclosed in eight months."
"`The house next door, it's been vacant six months, maybe longer. People across the street, they're trying to sell. Three homes down, it's vacant,' Ukolowicz said. `Anyone trying to sell their home right now in the area is up against all the vacant homes. Why should I buy this house for $175,000 when the bank will sell that one for $130,000?'"
And this is when the economy is "expanding" and when we have "low" unemployment. It seems to me that someone with the initials JHK predicted all of this.
No, that is merely a very local, very temporary problem, caused by very local, very temporary conditions. As always, now is a great time to buy or sell a home, and remember, real estate always goes up in value.
And more SUVs parked in front of the house than drivers living in it is not a sign of insanity, it is a measure of how much your neighbors will envy you.
Ah, the American Dream.
Only a tiny fringe can imagine this becoming a nightmare, it seems, and they are easily ignored, right?
But as an opinion, I am not sure Kunstler has really thought out what it means when this all comes crashing down, as he so fervently desires - watching his problems dealing with a local weather related disruption a year ago, I'm not sure he has actually understood what he predicts.
It looks half-local to me. The other half is the unfortunate combination of a housing bubble coinciding with a collapse of lending standards. These poor people should not have been given loans.
I'm pretty sure they were given them because the debt is somehow passed through to FDIC insured CDs:
The other half is the unfortunate combination of a housing bubble coinciding with a collapse of lending standards
In Ohio, we didn't really see much of a boom in real estate and so we've avoided a bust. Home prices are just flat. I guess that's one good thing about living in a dull state to which no one would reloacte unless they had to. Anyway, there are a lot of these neighborhoods where people were given loans they never should have received. The problem of unloading these forclosed homes is exacerbated by the fact that the builders are still building the exact same house in the next phase of the development. Who wants to buy a 2 or 3 year old foreclosed home when you can buy the exact same home brand new. the thing that puzzles me about it is that with the most obnoxious lending practices, the builder is also the lender. Ohio has laws forbidding these predatory type loans but has an exception when it is "for sale by owner", so these big builders build 10's of thousands of homes then they act as the bank when it sells so that it can be FSBO and they can avoid these laws. So what i don't understand is how they can continue to give out these loans and hold all these forclosed homes. They're not screwing the bank, bc/ they are the bank, they're screwing themselves. Any real estate moguls here that explain to me what I'm missing here?
I think that they are reselling these mortgages on the secondary market (HUGE BTW). Perhaps indicidual mortgages ocasionally, but typically, every couple of months they package them up, perhaps through Fannie or Ginnie Mae, and sell the package.
You, as an individual, can buy a small $100,000 slice of a Ginnie Mae. China is one of the big buyers (higher yield than US T-Bills). I am unsure of the sophisicated methods of reducing risk (they are there) and layering defaults. (One can buy the last xx% of value in a portfolio, so that mortgage losses hit those that hold the upper layers).
Hope this helps,
Alan
BTW, Housing bubble burst is good for New Orleans. Should drive down cost of materials and we will get migrant construction workers.
Alan, yea that makes sense. It also makes it all the more perverse. They avoid the anti-predatory lending laws by selling as a "for sale by owner" then immediately dump the loans into the secondary market. Brilliant! I should have been a banker! (not really, I wouldn't be able to sleep at night if I made a living doing crap like that.)
Oh and they don't securitize these packaged loans every few months. There is a market out there that satsifies this demand every single day. This is how Fannie Mae/Mac are now on the hook for something like over 40% of the total market and over 60% of the sub prime market. I would love to get updates on those numbers though as they are about 6 mos old and from memory.
The migrant construction worker thing is an odd phenomenon- they have it down to a science. My in-laws are owner-operators of an RV park in central ohio. 20 minutes after the start of a bad hail storm, construction workers (mostly roofers) started calling, by 30 minutes after the storm ended every spot at the park was filled by migrant construction workers. Now almost 2 months after the storm they're still full of migrant workers (and insurance adjusters!). But I wonder why are there so many idle migrant construction workers sitting around watching the weather channel for the next job (most of them are from the carolinas and georgia) with the market in LA, TX and MS the way it is?
I know, I know- just save your comments about the cost of RV'ing and the future of RV parks. My in-laws are doing very well right now and they're in their 60's. They just need to make it a few more years then they'll retire. Irrespective of PO, no one in the younger generation is willing to take over the family business from them when they retire.
Phineas it does not sound like such a bad business model for someone who's handy. Get a smallish motorhome, and go around doing the work. You can often camp on city streets if you're crafty, and even here in Silicon Valley I've found odd little encampments of people living in motorhomes...... like the hobo jungles of old, they're neat and probably really frown on any activities that would create trouble and raise their profile. Motorhomes are expensive to fuel, but out on the Interstate, there's always a truck to draft off of.....
You know ... I read a book a while back but I'm having a hard time remembering the author or title. It was about bubbles, and irrational exuberance. If I'm remembering correctly the author grouped housing bubble cities as "international." Cities with big airports?
I think his idea was that people in or around the international business community was more caught up in this thing than others.
(I think it was "Irrational Exuberance" by Robert Shiller. I see that I talked about the book here back in March.)
Read this one for the process. Really good I think. Here is just a snippet.
If These Are Bubbles, Where Is All That Hot-Air Money Coming From?
November 25, 2006 by Katy Delay
Securitization is a fabulous tool invented by the financial industry to survive and evolve under existing banking regulations. As they were first envisioned, these transactions had -- and still have -- great potential as a safety net to insure healthy lender risk. Unfortunately, and probably through lack of experience, the financial community has let them evolve into a monstrous money-making machine. Here's how it works.
A bank receives deposits, and its function is to lend that money out at a profit. (We won't go into fractional reserve banking here, although this multiplies the problem when things go awry. For now, however, let's just assume the bank lends a fixed multiple of what it takes in.)
The bank (or other type of financial institution with access to funds) finds good borrowers with at least a decent credit score to whom they lend the money for purchases, say for a house, a car, or whatever the borrower fancies.
Instead of following up on the repayments through their own loan department like they used to, the banks now transfer those loans to an agency that will fulfill this task. At the same time, they package the loans according to the degree of risk, and then they sell the loans to the general marketplace.
The buyers of these packaged loans can then buy "insurance" to cover the risk, from individuals and companies who want to assume that risk for a price (a piece of the interest action) and who are supposedly able to come up with the cash should a default occur. So far so good.
The bank now no longer has any loans on the books, so it is free to make a second set of loans based on the same fractional-reserve multiple of the deposits it holds -- but this time in effect using 100% of the loan-package buyers' funds to do so, i.e. so far, this is still a good thing; but as we'll see, it's good only up to a point.
As you can imagine, this doubling, tripling or quadrupling of loans allows for an expansion of the lending industry; and the market pool of good borrowers (and the good borrowers' credit appetite) eventually maxes out. To palliate this inconvenience, and since the bank is no longer shouldering the risk from its own loans, the bank now lowers the bar for borrowing so that those with a lower credit score may become borrowers. This expansion has presently extended into what some believe is dangerous territory; but this is only half of the problem.
The other half occurs when the buyers of these packaged loans either do so with what is called leveraging, i.e. they buy on credit themselves; or they sell these loans to others who do the leveraging. Hedge funds, for example, have sometimes been a source of unwisely leveraged funds that are not yet under industry control. And hedge funds are very popular these days.
According to Doug, much of the credit risk involved at this higher level is also "insured" in the same manner as in Stage 4, only this time the insurers never actually pay for the loans they are "insuring." As with real "insurance," they only need to pay in case of default. And this so-called "credit derivative" process is repeated over and over again, in effect allowing the loan-package insurers to borrow to the degree of the "insurance" market's willingness to take on risk.
When I was much younger, I was amazed at how the compounded interest of a mortgage payment multiplied the total $$ paid back to the bank. Now, at every layer of re-selling this loan, every institution skims off a profit and passes on the loan to someone else, effectively increasing the debt at every level. The top level seems to always be some government agency or government supported agency like FannieMae or FreddieMac.
All this means to me is that when things unravel, the poor, regressively taxed taxpayer gets saddled with the bill from bailing out the fed. agencies (S&L crisis writ large), at the same time they are on the street because their over-financed home has been repo'd. Kind of like the Dragon swallowing its tail here.
A recent post that I wrote about Credit-Default Swaps and the impact of such credit derivatives on structural stability of the global economy. It goes much farther than just mortgages--all borrowing is subject to this credit derivative process:
No, that is merely a very local, very temporary problem, caused by very local, very temporary conditions. As always, now is a great time to buy or sell a home, and remember, real estate always goes up in value.
It is in no way a local problem. There is a nationwide housing glut and we are on the cusp of a nationwide housing bubble bust.
In 2000 the total value of homes in the US was $11.4 trillion. Today that number has shot up to $20.3 trillion; nearly double.
At the same time, mortgage-debt in 2000 was a trifling $4.8 trillion (about half) while in 2006 it skyrocketed to a whopping $9.3 trillion.
And real estate does not always go up. In Los Angeles in the last cycle, prices peaked in 1989 and bottomed out in 1997. In that interval, L.A. lost 40% of its real value. But they are back up again now and headed for an even greater collapse. The same thing happened in Texas when oil prices collapsed in the 1990s. Billions were lost in Houston and Dallas real estate when prices collapsed.
One of the first in line was Alan Greenspan. As recently as May 18, the former Federal Reserve chairman put an exclamation point on the housing slowdown when he declared, "The boom is over." But now, the "worst may well be over," Greenspan was quoted as saying Oct. 7, after mortgage applications posted their biggest weekly gain since June, 2005.
I wanted to dig into it because I think the local/national aspect was not that clear. Neighborhoods have gone bad (collapsed?) in the past. It wasn't always part of a national trend. But when the national trend puts people in jeopardy, some will be closer to the edge than others.
Some neighborhoods which had been undesirable in the past have been able to use their new boom-equity to give themselves makeovers, to bootstrap themselves a bit. It would be sad to see those sink back post-boom.
Fair enough - Baltimore comes to mind as an example.
The problem this time round is not how regional various markets are, but the sheer scale of financial investment, and the lack of any alternative to that financial structure, which seems to be built mainly on sand - 11 trillion dollars of conjured 'equity,' which is just starting to be recognized as 11 trillion dollars of additional debt that somebody is holding the bag to.
Some people seem to think that the Chinese are the unlucky ones, but I don't really think so - after all, they still make things other people want to buy. And they own the debt, they don't have to pay it back - unless Americans have finally gotten to the point that they will simply walk away from any obligations concerning the future.
Like my CD, aren't the Chinese holding government-backed securities?
This is not my field and something I can barely puzzle about, but I wonder what fraction of the debt is in unbacked securities (and derivatives?). In a widespread default, they'd get burned ... but maybe not take the backed securities with them?
What's the source for these numbers?
(not that I'm doubting their accuracy).
They don't include US trade deficit, or do they? And they don't include the trillions of future Social Security and Medicare obligations.
If you wish to see even more of such statistics see here. The relevant section is "Flow of Funds Accounts". The rest of the sections are very interesting, too.
The trade deficit is not debt, it's the imbalance between imports and exports. It does have influence on the debt, but not directly.
The debt of the govt. is 9 trillion, when the social security so called "trust fund" debt is included. It all depends on how you do the accounting.
For your guide, $41.1 trillion is abt. 330% of GDP and it is atrocious. By FAR the largest overall debt of any nation.
Your calculation is somewhat deceptive. Large components of this debt cancel each other out and/or are beneficial. On a head-to-head (apples to apples) comparison the US has lower levels of debt than many developed countries, including Japan and many in Europe.
Is the level of US corporate debt higher than other countries? Is it too high? Should corporations reduce debt levels? I think the answer is no in all three cases.
US mortgage debt is high because their is a large percentage of homeowners and they have access to capital markets. There is nothing wrong with people holding mortgages and nothing on the face of it.
If Americans owe each other debt, it is not necessarily a problem at all. The level of US foreign debt, the government's balance of payments shortfall and the low level of savings among Americans are real issues. But the parade of numbers above is basically meaningless.
Leaving aside much complexity again, America has tended to buy things like plasma TVs or Ipods or jet skis or Nikes or SUVs or clothing or toys or granite counter tops, or whatever else would reflect classic consumer consumption.
What they haven't seem to bought is factories, maintained infrastructure, or improved things like public health systems. For example, check out the infrastructure along the Gulf Coast - if America had gone into massive debt to restore what was destroyed, that would be one thing, but to simply keep building more houses in the desert is something else.
And another thing which is somewhat different with debt in the U.S. and other countries - the normal level of credit card interest would be illegal as usury in most other countries - and the amount of money Americans spend servicing their personal debt is much higher than in other countries. But as noted, in America, that works out, since the Americans that can't do math are paying the good salaries of those who know how to make money from that fact.
However, transferring money is not quite the same thing as investing it in an electrical system which can handle the challenges which America will all too clearly be facing in the next decade.
Debt (leaving aside the issue of debt peonage at the personal or national level) can be considered neutral - it is the purpose of the debt that is important.
I wish I could disagree with you on the debt issue - it is much more fun. However, I think we are saying the same thing.
Debt can be considered neutral. In some applications (corporate debt, mortgages, student loans), it is frequently good. In some it is bad (usury, excessive consumption, to spend more than one makes - whether a government or an individual)
I don't deny that there are several aspects of the American debt situation that are enormous problems. Using credit cards to buy stuff that costs more than one will earn is a clear example. I do think it is going to come to a screeching halt at some point as it seems clear that the US can not borrow to consume forever.
None-the-less, just stacking up total US debt and getting scared by the enormity of the figure is not constructive. Nor does it present an accurate depiction of reality. The massive figure in the original post contains both good and bad debt - although I may admit the overall picture is worse than neutral.
I don't think it is entirely accurate to say that the US has bought only big screen TVs and invested nothing in infrastructure or equipment. A large portion of mortage debt is good. I am sure most of the corporate debt is going to productive purposes (debt is subject to greater scrutiny than equity spending). Google is worth more than the GDP of Thailand or Indonesia - and probably more than all of their factories. The US has also invested in a lot of manufacturing capacity. The just chose to locate it in China.
The Economist recently observed that modern business realized that the value creation process could be divided into three steps: design, production and marketing. Of these production is the least important, most volatile and most easily replaced. That is why US business has wisely chosen to outsource them and keep the high value aspects. I think this presents a huge, and potentially insurmountable, problem for the class of Americans who would work in factories. However at a system level, I don't think it is a problem.
I know people love to fixate on the idea that the US has completely lost its ability to "attach uppers to lowers" and whatever else they do in factories. It is a common belief that making something solid, like a cigarette lighters or washing machines is good, but making something intangible such as software, design or finance is bad. I don't agree. Comparative advantage is alive and well.
None of this is to say that the US is in great shape (I don't think it is) or that debt doesn't present a problem (I think it does). Just that the uneducated and hysterical obsession with an imminent American crash that fill the comments here is closer to wishful thinking than analysis.
I too in general agree, except for something which is part of my focus on peak oil. That is, in the end, if the system of international trade/relations/laws breaks down, it won't be the people with the factories that have to wonder how they will implement the new and improved designs, it will be the people with the new and improved ideas wondering how they can be manufactured.
And in turn, you can see how well having factories works compared to the engineering talent - the Russians shipped home every factory they could get their hands on at the end of WWII, both in Germany and in the parts of Japanese owned China, and they still make the same basically 1942 knock-off BMWs under a couple of different names.
There was an interesting book which ties both of these threads together in a more than tangential way, 'The Japan That Can Say No' - a good overview is found at http://en.wikipedia.org/wiki/The_Japan_That_Can_Say_No Intriguingly, according to the less than always reliable Wikipedia, 'The authorized 1991 Simon & Schuster translation by Frank Baldwin (out of print) did not include the essays by Morita.' That is, the writing of Sony chairman Akio Morita somehow slipped through the cracks, according to his own wishes. And the other author, Shintaro Ishihara is a fairly prominent political figure still. Of course, it was a book written at the peak of Japan's economic boom, at the very end of the Cold War, and parts of it seem to be filled with hubris of the sort which precedes a great fall. And it is hard to know if it was written merely for a domestic Japanese argument.
I do know that in the mid 1980s, as the Japanese started to dominate chip manufacture, especially of chips used in things like cruise missiles, that the U.S. created Sematech in response. A good book review can be found here - www.hbs.edu/bhr/archives/bookreviews/76/2002springadavies.pdf
However, living around DC, the emphasis I remember most was on ensuring that America could fight a war without relying on foreign manufacturers providing the components, which is where the point of the Japanese book comes in.
The thing is, the clear recognition of a challenge based on reality (a cruise missile requires x chips, we require y cruise missiles, and no one in America makes chip x) and the meeting of that challenge (forget ideology, how can we best foster a doemstic industry making chip x) currently seems to be the sort of thing which America is no longer capable of. Not that it can't do it, merely that it is very difficult to imagine it in today's America. Especially one that is used to ignoring the future while spending today.
As this is straying quite far from debt, suffice it to say, domestic manufacturers, like domestic food production, and a lack of external debt, are classic measures of strength in a geopolitical sense.
I'll respond to Jack here, just to preserve column width. I read expat. Expat's been writing alot lately. Good stuff, BTW. I like expat. Seems to have a head on his shoulders.
I've followed the debt/housing bubble thing for some time. I always like to point out that a large part of this debt is owned by South Koreans. American banks sell it. Simmons says - so goes Arabia, so goes the world. I say, so goes the US, so goes the world. And the world doesn't want to go down. Hello?
Unfortunately, size matters and debt is never meaningless, domestic or foreign.
But let's examine a few things:
"Debt is canceled out because is owed to one another" is a well-worn palliative - "pour epater les p'tits bourgeois", if you will excuse my french. In fact, 1% of the richest Americans own 38% of all financial assets and 2% own 55% - so everyone owes, alright, but an extremely tiny minority owns most of the interest on that debt. Anyone for storming the Bastille?
As expat has pointed out very well, it does matter greatly to what use debt is put to. Examining only home mortgage debt, between the end of 2000 and 2Q2006 it rose by $4.73 trillion or 92%. In the same time, the total value of new home sales was $1.55 trillion. Assuming 80% was financed at 90% debt/equity this required a total of $1.12 trillion in new mortgages debt. Where did the other $3.61 trillion (=4.73-1.12) go? a)consumption via equity loans and b)raising existing home prices, ie pumping the bubble. Not good at all, as home prices are now dropping fast and these loans are very exposed.
Debt size matters in the economy. In the USA between 1950 and 2005:
Total energy use (in BTU) up 2.9 times.
Real GDP up 6.2 times.
Total real debt up 14.1 times.
This is scary, but it gets scarier when you see a time graph of those three together (one of these days I have to learn how to post them here). Most of the debt rise has come after 1980 and has accelerated even more sharply since 2000. In particular, the rise in the financial sector's debt has been exponential: in 1980 such debt was a small 11.2% of GDP, in 2000 82.7% and today a whopping 117%. Back in 1950 it was a minuscule 0.5% of GDP.
I do not wish to expand on this further here, but one can also obtain rather interesting insights as to the makeup of current GDP from these numbers and their relationships. In one word: flufferfluff.
Comparison with other countries: a)Other greatly indebted countries do not back/issue the global reserve currency (i.e. the dollar). Such a condition of currency debasement cannot last for much longer. And what backs the dollar now? b)US debt at $41.1 trillion is equal to 100% of global GDP, or 150% of GDP of the rest of the world (world minus the US). Wow.
I wholeheartedly agree with you on the balance of payments and savings issues. Americans are now dipping into savings to consume (negative personal savings rate) for two years in a row. Last time the US had a negative savings rate was in the midst of the Great Depression.
Your second hailstorm of disconnected numbers hasn't done much to address or refute my main point: Some debt is good and some is bad. Mixing it all up and pointing to a giant number is meaningless. The US should have a giant amount of debt. The US is giant and debt is an important way of financing a modern economy.
Your comments mixes up so many points, it is hard to address them. The disparity of wealth in America is a problem because it is a disparity of wealth. If people should revolt, it is because the rich are too rich. The link to debt is fairly weak.
Debt in the financial sector has presumably grown because of the enormous and positive growth of the US financial sector. I am sure you would find the same th
The Denver Post from Colorado:
And this is when the economy is "expanding" and when we have "low" unemployment. It seems to me that someone with the initials JHK predicted all of this.
And more SUVs parked in front of the house than drivers living in it is not a sign of insanity, it is a measure of how much your neighbors will envy you.
Ah, the American Dream.
Only a tiny fringe can imagine this becoming a nightmare, it seems, and they are easily ignored, right?
But as an opinion, I am not sure Kunstler has really thought out what it means when this all comes crashing down, as he so fervently desires - watching his problems dealing with a local weather related disruption a year ago, I'm not sure he has actually understood what he predicts.
http://www.denverpost.com/business/ci_4719353
It looks half-local to me. The other half is the unfortunate combination of a housing bubble coinciding with a collapse of lending standards. These poor people should not have been given loans.
I'm pretty sure they were given them because the debt is somehow passed through to FDIC insured CDs:
https://bank.countrywide.com/scontent.aspx?cmtag=Content-cds
I have a CD like that. Did I give those unfortunates a loan with 100% financing and adjustable rate? Maybe. And sad if that's what happened.
In Ohio, we didn't really see much of a boom in real estate and so we've avoided a bust. Home prices are just flat. I guess that's one good thing about living in a dull state to which no one would reloacte unless they had to. Anyway, there are a lot of these neighborhoods where people were given loans they never should have received. The problem of unloading these forclosed homes is exacerbated by the fact that the builders are still building the exact same house in the next phase of the development. Who wants to buy a 2 or 3 year old foreclosed home when you can buy the exact same home brand new. the thing that puzzles me about it is that with the most obnoxious lending practices, the builder is also the lender. Ohio has laws forbidding these predatory type loans but has an exception when it is "for sale by owner", so these big builders build 10's of thousands of homes then they act as the bank when it sells so that it can be FSBO and they can avoid these laws. So what i don't understand is how they can continue to give out these loans and hold all these forclosed homes. They're not screwing the bank, bc/ they are the bank, they're screwing themselves. Any real estate moguls here that explain to me what I'm missing here?
You, as an individual, can buy a small $100,000 slice of a Ginnie Mae. China is one of the big buyers (higher yield than US T-Bills). I am unsure of the sophisicated methods of reducing risk (they are there) and layering defaults. (One can buy the last xx% of value in a portfolio, so that mortgage losses hit those that hold the upper layers).
Hope this helps,
Alan
BTW, Housing bubble burst is good for New Orleans. Should drive down cost of materials and we will get migrant construction workers.
I know, I know- just save your comments about the cost of RV'ing and the future of RV parks. My in-laws are doing very well right now and they're in their 60's. They just need to make it a few more years then they'll retire. Irrespective of PO, no one in the younger generation is willing to take over the family business from them when they retire.
I think his idea was that people in or around the international business community was more caught up in this thing than others.
(I think it was "Irrational Exuberance" by Robert Shiller. I see that I talked about the book here back in March.)
A Short History of Financial Euphoria
by Galbraith which is worth the read IMO
Read this one for the process. Really good I think. Here is just a snippet.
If These Are Bubbles, Where Is All That Hot-Air Money Coming From?
November 25, 2006 by Katy Delay
http://www.prudentbear.com/archive_comm_article.asp?category=Guest+Commentary&content_idx=60572
John
All this means to me is that when things unravel, the poor, regressively taxed taxpayer gets saddled with the bill from bailing out the fed. agencies (S&L crisis writ large), at the same time they are on the street because their over-financed home has been repo'd. Kind of like the Dragon swallowing its tail here.
SOOOOO, Joe Sixpack walks on his house, foreclosure.
THEN the Pension funds where Joe works/used to work, now have losses because of foreclosure.
Joe has no pension, because the pensions bought the securitized bonds.
In essence, Joe's purchase of the house he can't afford, ruins his pension fund.
Financial Wizardry & Collapse
It is in no way a local problem. There is a nationwide housing glut and we are on the cusp of a nationwide housing bubble bust.
And real estate does not always go up. In Los Angeles in the last cycle, prices peaked in 1989 and bottomed out in 1997. In that interval, L.A. lost 40% of its real value. But they are back up again now and headed for an even greater collapse. The same thing happened in Texas when oil prices collapsed in the 1990s. Billions were lost in Houston and Dallas real estate when prices collapsed.
Ron Patterson
http://www.msnbc.msn.com/id/15416909/
Ron Patterson
Some neighborhoods which had been undesirable in the past have been able to use their new boom-equity to give themselves makeovers, to bootstrap themselves a bit. It would be sad to see those sink back post-boom.
The problem this time round is not how regional various markets are, but the sheer scale of financial investment, and the lack of any alternative to that financial structure, which seems to be built mainly on sand - 11 trillion dollars of conjured 'equity,' which is just starting to be recognized as 11 trillion dollars of additional debt that somebody is holding the bag to.
Some people seem to think that the Chinese are the unlucky ones, but I don't really think so - after all, they still make things other people want to buy. And they own the debt, they don't have to pay it back - unless Americans have finally gotten to the point that they will simply walk away from any obligations concerning the future.
Oh. Hmmm.
This is not my field and something I can barely puzzle about, but I wonder what fraction of the debt is in unbacked securities (and derivatives?). In a widespread default, they'd get burned ... but maybe not take the backed securities with them?
Mortgages : $12.6 trillion
Treasury bonds : 4.8
Corporate " : 3.1
Municipal " : 2.3
Consumer Credit: 2.3
Other : 2.5
------------------------------------
Sub-Total $27.6 Trillion
That's the non-financial sector of the economy only.
Here's the debt of the financial sector:
Corporate bonds : $ 4.5 trillion
Agcy+GSE mtg. pools : 3.8
GSE bonds : 2.7
Open mkt. paper : 1.5
Other : 1.0
-------------------------------------
Sub-total : $13.5 trillion
Grand Total : $41.1 trillion
That's 41.1 with 12 zeros after it.
Never before in the history of mankind have so many zeros meant so little to so many people.
Seriously, I think there is a collective madness to this.
hmm then how about
1,75C,D65,00B,000
no i guess that doesn't work either?
We won't have to worry until we reach महाशंख.
Ohmmmmm...Ohmmmmmmm.....
(not that I'm doubting their accuracy).
They don't include US trade deficit, or do they? And they don't include the trillions of future Social Security and Medicare obligations.
See here
It is a PDF file.
If you wish to see even more of such statistics see here. The relevant section is "Flow of Funds Accounts". The rest of the sections are very interesting, too.
The trade deficit is not debt, it's the imbalance between imports and exports. It does have influence on the debt, but not directly.
The debt of the govt. is 9 trillion, when the social security so called "trust fund" debt is included. It all depends on how you do the accounting.
For your guide, $41.1 trillion is abt. 330% of GDP and it is atrocious. By FAR the largest overall debt of any nation.
Is the level of US corporate debt higher than other countries? Is it too high? Should corporations reduce debt levels? I think the answer is no in all three cases.
US mortgage debt is high because their is a large percentage of homeowners and they have access to capital markets. There is nothing wrong with people holding mortgages and nothing on the face of it.
If Americans owe each other debt, it is not necessarily a problem at all. The level of US foreign debt, the government's balance of payments shortfall and the low level of savings among Americans are real issues. But the parade of numbers above is basically meaningless.
Leaving aside much complexity again, America has tended to buy things like plasma TVs or Ipods or jet skis or Nikes or SUVs or clothing or toys or granite counter tops, or whatever else would reflect classic consumer consumption.
What they haven't seem to bought is factories, maintained infrastructure, or improved things like public health systems. For example, check out the infrastructure along the Gulf Coast - if America had gone into massive debt to restore what was destroyed, that would be one thing, but to simply keep building more houses in the desert is something else.
And another thing which is somewhat different with debt in the U.S. and other countries - the normal level of credit card interest would be illegal as usury in most other countries - and the amount of money Americans spend servicing their personal debt is much higher than in other countries. But as noted, in America, that works out, since the Americans that can't do math are paying the good salaries of those who know how to make money from that fact.
However, transferring money is not quite the same thing as investing it in an electrical system which can handle the challenges which America will all too clearly be facing in the next decade.
Debt (leaving aside the issue of debt peonage at the personal or national level) can be considered neutral - it is the purpose of the debt that is important.
Debt can be considered neutral. In some applications (corporate debt, mortgages, student loans), it is frequently good. In some it is bad (usury, excessive consumption, to spend more than one makes - whether a government or an individual)
I don't deny that there are several aspects of the American debt situation that are enormous problems. Using credit cards to buy stuff that costs more than one will earn is a clear example. I do think it is going to come to a screeching halt at some point as it seems clear that the US can not borrow to consume forever.
None-the-less, just stacking up total US debt and getting scared by the enormity of the figure is not constructive. Nor does it present an accurate depiction of reality. The massive figure in the original post contains both good and bad debt - although I may admit the overall picture is worse than neutral.
I don't think it is entirely accurate to say that the US has bought only big screen TVs and invested nothing in infrastructure or equipment. A large portion of mortage debt is good. I am sure most of the corporate debt is going to productive purposes (debt is subject to greater scrutiny than equity spending). Google is worth more than the GDP of Thailand or Indonesia - and probably more than all of their factories. The US has also invested in a lot of manufacturing capacity. The just chose to locate it in China.
The Economist recently observed that modern business realized that the value creation process could be divided into three steps: design, production and marketing. Of these production is the least important, most volatile and most easily replaced. That is why US business has wisely chosen to outsource them and keep the high value aspects. I think this presents a huge, and potentially insurmountable, problem for the class of Americans who would work in factories. However at a system level, I don't think it is a problem.
I know people love to fixate on the idea that the US has completely lost its ability to "attach uppers to lowers" and whatever else they do in factories. It is a common belief that making something solid, like a cigarette lighters or washing machines is good, but making something intangible such as software, design or finance is bad. I don't agree. Comparative advantage is alive and well.
None of this is to say that the US is in great shape (I don't think it is) or that debt doesn't present a problem (I think it does). Just that the uneducated and hysterical obsession with an imminent American crash that fill the comments here is closer to wishful thinking than analysis.
And in turn, you can see how well having factories works compared to the engineering talent - the Russians shipped home every factory they could get their hands on at the end of WWII, both in Germany and in the parts of Japanese owned China, and they still make the same basically 1942 knock-off BMWs under a couple of different names.
There was an interesting book which ties both of these threads together in a more than tangential way, 'The Japan That Can Say No' - a good overview is found at http://en.wikipedia.org/wiki/The_Japan_That_Can_Say_No Intriguingly, according to the less than always reliable Wikipedia, 'The authorized 1991 Simon & Schuster translation by Frank Baldwin (out of print) did not include the essays by Morita.' That is, the writing of Sony chairman Akio Morita somehow slipped through the cracks, according to his own wishes. And the other author, Shintaro Ishihara is a fairly prominent political figure still. Of course, it was a book written at the peak of Japan's economic boom, at the very end of the Cold War, and parts of it seem to be filled with hubris of the sort which precedes a great fall. And it is hard to know if it was written merely for a domestic Japanese argument.
I do know that in the mid 1980s, as the Japanese started to dominate chip manufacture, especially of chips used in things like cruise missiles, that the U.S. created Sematech in response. A good book review can be found here - www.hbs.edu/bhr/archives/bookreviews/76/2002springadavies.pdf
However, living around DC, the emphasis I remember most was on ensuring that America could fight a war without relying on foreign manufacturers providing the components, which is where the point of the Japanese book comes in.
The thing is, the clear recognition of a challenge based on reality (a cruise missile requires x chips, we require y cruise missiles, and no one in America makes chip x) and the meeting of that challenge (forget ideology, how can we best foster a doemstic industry making chip x) currently seems to be the sort of thing which America is no longer capable of. Not that it can't do it, merely that it is very difficult to imagine it in today's America. Especially one that is used to ignoring the future while spending today.
As this is straying quite far from debt, suffice it to say, domestic manufacturers, like domestic food production, and a lack of external debt, are classic measures of strength in a geopolitical sense.
I've followed the debt/housing bubble thing for some time. I always like to point out that a large part of this debt is owned by South Koreans. American banks sell it. Simmons says - so goes Arabia, so goes the world. I say, so goes the US, so goes the world. And the world doesn't want to go down. Hello?
But let's examine a few things:
- "Debt is canceled out because is owed to one another" is a well-worn palliative - "pour epater les p'tits bourgeois", if you will excuse my french. In fact, 1% of the richest Americans own 38% of all financial assets and 2% own 55% - so everyone owes, alright, but an extremely tiny minority owns most of the interest on that debt. Anyone for storming the Bastille?
- As expat has pointed out very well, it does matter greatly to what use debt is put to. Examining only home mortgage debt, between the end of 2000 and 2Q2006 it rose by $4.73 trillion or 92%. In the same time, the total value of new home sales was $1.55 trillion. Assuming 80% was financed at 90% debt/equity this required a total of $1.12 trillion in new mortgages debt. Where did the other $3.61 trillion (=4.73-1.12) go? a)consumption via equity loans and b)raising existing home prices, ie pumping the bubble. Not good at all, as home prices are now dropping fast and these loans are very exposed.
- Debt size matters in the economy. In the USA between 1950 and 2005:
Total energy use (in BTU) up 2.9 times.Real GDP up 6.2 times.
Total real debt up 14.1 times.
This is scary, but it gets scarier when you see a time graph of those three together (one of these days I have to learn how to post them here). Most of the debt rise has come after 1980 and has accelerated even more sharply since 2000. In particular, the rise in the financial sector's debt has been exponential: in 1980 such debt was a small 11.2% of GDP, in 2000 82.7% and today a whopping 117%. Back in 1950 it was a minuscule 0.5% of GDP.
I do not wish to expand on this further here, but one can also obtain rather interesting insights as to the makeup of current GDP from these numbers and their relationships. In one word: flufferfluff.
Your comments mixes up so many points, it is hard to address them. The disparity of wealth in America is a problem because it is a disparity of wealth. If people should revolt, it is because the rich are too rich. The link to debt is fairly weak.
Debt in the financial sector has presumably grown because of the enormous and positive growth of the US financial sector. I am sure you would find the same th