Is the USA economy facing troubles ahead?

Question

I read somewhere that in the private sector, there is $1.01 in debt for every $1.00 in assets. This is private sector debt, not government debt. Numbers like that on the balance sheet of any type of business would indicate bankruptcy.
This is pretty much the same situation that lead to the great depression. During the 1920s, middle class America borrowed money on their homes and other assets to invest in the stock market. Many other people bought stock on margin.
All that investing created a bubble. When the bubble burst, those people who purchased with borrowed money lost everything.
Today there is a similar situation. Instead of stocks, however, people are in hock up to their ears on real estate. This too created a real estate bubble, which can burst and drive property values down. When property values fall below the mortgage balances, bank will require more capital investment from the home owner.
With no savings, where will this capital come from? Will it be the 1930s again?

Answer 1

This isn't the 1920s. The Fed started raising rates in 2004, raised them 17 straight times - there has been a 'housing bubble' but its effects on the rest of the economy are overrated. The risks you point out exist, but the bankers who extend credit to businesses are aware of them. While excess liquidity did result in lower than normal rates and lower than normal credit spreads, you need to consider that in the broader economy, most floating rate corporate debt is supported by a current asset borrowing base, thus is self-liquidating, while the longer-term debt is fixed rate, meaning even if rates go up, the rates on that debt won't go up for 5-7 years.

I think that's the saving grace here - the debtors are locked in to some really low rates for some time.

Now I've also heard a lot of China this and China that but the bottom line is as long as their economy is growing, they need currency reserves and a certain portion of those has to be dollars. Now, the FT had an interesting article about how they don't need to reserve that the current level, but I'm thinking what they're doing is reserving the ability to devalue their own currency to maintain exports.

Bottom line there are a lot more checks and balances than there were in the 1920s and I think that a shift in one area actually has less of a spillover effect to other areas - - - which is why you've seen several discrete asset bubbles, NASDAQ, then power, then housing, then raw materials - - - with significant overlap only in the last two, over the last ten years.

So the thing to do is watch, devour financial information, and stay liquid - you can ride one wave, get off before it breaks, then ride another.

I think it's going to be that way for some time.

As for "economists are still debating the Great Depression" I think it's fairly settled that the "right" answer is somewhere between Rothbard and Friedman and that Keynes had it wrong.

Answer 2

Fear not, rabbit. The sky is not falling. Statistics, especially those generated by the US Government, are a scary thing only because people believe them. Harry Truman used to say: "There are lies, damned lies, and statistics." There is so much wealth in the US, no one can accurately count it all.
We live in the best country in the world. Ours is the strongest economy. There is no reason to believe it will collapse.
Where I live, houses are selling for more than they ever have in the past 18 years. Mortgage money is available. There is a "floor" in the housing market. Consider this: If you have a home and the value of the home drops below the equity you have in the home, would you sell at a loss and move somewhere, then start a losing cycle all over again? Most people would put off selling until prices rise again. They always do.
Two examples of really ridiculous stats generated by the US government. 1. There is a negative savings rate in the US. Besides being mathematically impossible, the stat only counts savings in banks.
2. There is the infamous 45 million uninsured. If a person is uninsured for even one day in a year, he is counted in the stat. About 28 million of the 45 million fall into that category.

Answer 3

This is probably the best illustration of the 'shrinking middle class' discussion. The real estate market is tanking, and it will only get worse over the next couple of years. At that time, all those folks in the middle class who have invested EVERYTHING in their home and have a barely manageable mortgage will lose what they have when they face refinancing. Times like these are not hard on the rich...in fact, they will only get richer, as they buy up the glut of homes for a song...and then make more money as a landlord. (As as a capitalist, I have no criticism of them for that, by the way). But it is the folks who have worked so hard for their American Dream who will be decimated by this collapse. And really...they are the real America. So yes...longwinded response to your question...the economy is facing serious trouble ahead. And it will be the people, not the leaders, who will suffer...

Answer 4

I really believe you're going to see the real estate market crash pretty hard in the next 2-3 years. People were driven by low interest rates to buy more house than they really could afford, and all the new construction you're seeing is of big houses that are well out of the price range of middle-income people and/or first-time home buyers. Those that got very low interest rate ARM's are going to have to refinance soon at higher interest rates, and too many of them are struggling to make payments now. In some areas, there's a 6-8 month backlog on homes that can't sell, and there's nobody there to buy them. Add to that the number of Baby Boomers who are going to retire in the next 3-5 years and are going to be looking to sell their homes at what are overinflated prices, who will be shocked when reality hits them in the face when there's no one there to buy.

I think you're going to see foreclosures skyrocket, if they haven't already. And when you don't have any savings and all of your money's tied up in your house, that's a recipe for total disaster. The real estate "flippers," for lack of a better term, are going to make a killing.

Answer 5

Economists are still debating the reasons for the great depression. America's economy has been strong for a long time. We have the largest GDP of any nation, and, the largest GDP per capita of any nation, as well. There are always bumps in different sectors, but, we have such a diverse economy, it is doubtful it will "crash" because one or two sectors soft. Housing in the larger markets has nearly tripled in 15 years, so, a downturn would be expected!

Answer 6

Like yelling "fire" in the theatre, the real danger is in the tramplings. However in some cases the guy that stays seated gets burned alive. diversify, remain prudent, try to smile.

Answer 7

The U.S. economy is kinda like the U.S. military...flawed from within.
all it will take is a good stiff wind and the U.S. economy will tumble like a house of cards.