House mortgage debt in the United States has grown by US$10 trillion since '99. As a percentage of disposable income, it rose from 64% to 100% - with more new debt added than in the previous 45 years combined. Add in consumer installment debt and the ratio rises to 131%.
Of course, when you add that much financing to a society, the financing industry is bound to make money. As a percentage of profits, more and more of America's profits have come from 'financing' as opposed to manufacturing. Wall Street got rich, handed out billions in bonuses, built mansions in the Hamptons and in Greenwich, CT, bought huge collections of monstrous art…and generally made itself obnoxious.
But now, at the upper end of the credit structure, Wall Street firms are getting sold off. After billions in losses, shareholders are giving CEOs the old heave-ho.
First, Warren Spector of Bear Stearns (NYSE:BSC) got axed.
Then, it was Peter Wuffli at UBS (NYSE:UBS).
He was followed by Stan O'Neal of Merrill Lynch (NYSE:MER). O'Neal made the headlines for generating two big numbers - the largest losses, at an estimated US$18 billion, and the largest 'golden parachute', at US$180 million. What are compensation boards thinking? Why not give the guy a kick in the pants instead? They must think shareholders are idiots; and they're probably right!
After the O'Neal story died down, along came Chuck Prince of Citigroup (NYSE:C) - America's largest bank. The firm is expected to write down US$5 billion this quarter. Chuck was chucked out.
And today's news brings a new victim - H&R Block (NYSE:HRB) finance chief William Trubeck.
Between the honchos at the top and the householders at the bottom are thousands of deals, and millions of ordinary people.
The deals are feeling the pressure. "Bond issuance plunges" reports Bloomberg.
And 'default swaps' - a form of insurance against bad loans - are rising to record prices, indicating a level of fearfulness not seen on Wall Street for many, many years.
The people in the middle must be getting a little sour, too. When the financing for deals slows, so do the new projects…the new companies…and the new jobs.
And so does the financing for new houses…and new cars… and all the other new things that make an economy grow…
Let's go back to the numbers above. US$10 trillion in new mortgage debt was added in the United States over the last seven years. That debt is another potential source of deflation, dear reader.
Bill Bonner
The Daily Reckoning Australia
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About the Author
Best-selling investment author Bill Bonner is the founder and president of Agora Publishing, one of the world's most successful consumer newsletter companies. Owner of both Fleet Street Publications and MoneyWeek magazine in the UK, he is also author of the free daily e-mail The Daily Reckoning.
