It is truly an amazing juncture we have come to in the United States.  The large scale sacrifice of American savers so that their fellow debtors may prosper has reached a fervor.  If you are unfamiliar with the game plan of Geithner, Summers, Bernanke, et al it is quite simple if we strip it down.

  1. No large U.S. bank may fail per directive by government - the cartel must be supported at all costs.
  2. All U.S. banks shall prosper via huge subsidization via Federal Reserve offering money at essentially free.
  3. U.S. banks can borrow from Fed at nearly free and lend to U.S. consumer at much more than free, making loads of money simply by turning on the lights each day. [Apr 20, 2009: How Banks will Outearn their Losses]
  4. Historical losses on balance sheet can be taken at leisure in the mortgage market since national accounting board was pressured politically 18 months ago to change rules; to allow banks to mark assets at their own discretion rather than a price they could get in an open market.
  5. U.S. debtors, struggling under massive debt load, are defaulting in large waves - not just in mortgages but in credit cards and autos (to lesser degrees).
  6. The banks are ok with item 5, due to items 1-4. i.e. they cannot fail, they can lose money on their 'own schedule' due to new accounting, they can pay savers almost nothing, and the Fed shall keep rates low for ages so that this game can continue.

It sounds like a perfect world, eh?  It is - except for the nation's savers who due to lack of return on their savings are running a massive (secondary) subsidization scheme, parallel to that of the Federal Reserve, to service the banks and their fellow citizen debtors.  [Mar 31, 2010: Ben Bernanke Content to Sacrifice American Savors to Recapitalize Banks and Benefit Debtors]

I noted a piece maybe 6 months ago (can't find it in the 6000 historical posts on the site!) that U.S. debtors debt was being reduced but apparently on a net basis none of it was due to actual pay downs of said debt.  All of it was due to defaulting on debt.   That is not to some folks are not adding to debt while others are paying it down; we are talking in aggregate.  Effectively debt levels in America would remain at staggering high levels, if not for a nation wide move to default on debt.  Which is now winked at and supported (not that they could admit it) by government and Federal Reserve.  Welcome to your Banana Republic where good behavior is punished and bad encouraged.

But it is worse than that - in that story from 6 months ago it was assessed that all the paydown was due to default but new debt was not being added in aggregate... in fact as the WSJ story explains below, on a net basis American debt is actually now headed back UP ex-default.  Which means while the total debt is going down, this is due to default, whereas if you peer under the surface - the non default debt is growing yet again.  (and why not? we now have trained our human Pavlov dogs there is no risk in taking on more debt... when it gets to onerous you just default)

Unfortunately with the wild orgy of spending excess across all income strata, even with 3 years of rampant default, we're still at extraordinarily high levels of debt.  [Dec 3, 2009: Debt to Income Ratio Essentially Doubles for all American Households in Past 2 Decades]  So this 'scheme' by the Fed must continue on for a long time.  I once had a thesis that Americans would not see the light and rather be forced into a return to their historical savings rate.   [Dec 29, 2008: What Happens if America Returns to a Historical Savings Rate?].  But no more.  Transfers from the saver class to the debtor class is much more easy than asking the greater populace to sacrifice.


The latest statistics from the Wall Street Journal:

  • 122%: U.S. household debt as a share of annual disposable income.
  • U.S. consumers are paring down their debts faster than many economists had expected. To understand what that means, though, it helps to know how they’re doing it.
  • As of the end of March, the average U.S. household’s total mortgage, credit-card and other debt stood at 122% of annual disposable income, meaning it would take a bit more than 14 months to pay it all off if everyone stopped spending money on anything else. That sounds like a lot, but it’s better than it was before: At its peak in the first quarter of 2008, the debt-to-income ratio stood at 131%. Economists tend to see 100% as a reasonable level.
  • The falling debt burden conjures up images of a nation seeking to repent after a decade of profligacy, conscientiously paying down mortgages and credit-card balances. That may be true in some cases, but it’s not the norm. In fact, people are making much more progress in shedding their debts by defaulting on mortgages and reneging on credit cards.
  • Since household debt hit its peak in early 2008, banks have charged off a total of about $210 billion in mortgage and consumer loans, including credit cards. If one assumes that investors suffered at least that much in losses on similar loans that banks packaged and sold as securities (a very conservative assumption), then the total — that is, the amount of debt consumers shed through defaults — comes to much more than $400 billion.  (what's half a trillion among friends?)
  • Problem is, that’s more than the concurrent decrease in household debts, which amounts to only $372 billion, according to the Federal Reserve. That means consumers, on average, aren’t paying down their debts at all. Rather, the defaulters account for the whole decline, while the rest have actually been building up more debt straight through the worst financial crisis and recession in decades.

But we have to look at the silver lining - all this defaulting allows consumers to spend their cash flow since they no longer need to service debt and (a) build up new debt (b) shop or (c) invest in the stock market!

  • In a sense, people who default on onerous debts — including the “strategic defaulters” who still have jobs and could pay — are doing the economy a favor. They’re freeing up cash to spend on other things, which can boost demand and give companies the confidence they need to start hiring again. If everybody just hunkered down and tried to pay their insurmountable debts, we might never have gotten out of the recession. Defaults are bad for the banks, but taxpayers already covered the cost of the losses through federal bailouts.  (reporter forgot to mention the multiple subsidization schemes I did; the federal bailout is a tiny piece compared to the constant handouts given each and every day)

Summary:  As long as all major banks are backstopped by U.S. taxpayer (i.e. will not be allowed to fail), said U.S. taxpayer may default on her debt as much as she wants since banks can take as many losses as necessary to keep the economy 'booming'.

Do you see how circular Banana Republic logic is?

I did love the last paragraph of the piece.

  • The bigger question, though, is what we as a society will learn from the experience. The lesson seems to be that the way to get ahead in the world is to take huge risks — buy a house you can’t afford with no money down, or invest huge amounts of borrowed money in risky loans — but let somebody else pick up the bill if things go wrong.

Works for the oligarchs, and now the citizens too.  Boo yah!