From Yahoo News - through the desk of Edward E. Cambas
There's been no end of talk about government debt lately. But some say the bigger problem for the long-term health of the economy is a different kind of budget shortfall: private debt.
The problem stems largely from the housing bubble of the last decade. And the sheer scale of today's household debt epidemic means that it could be a persistent drag on efforts to stimulate broader growth in the economy and to reduce unemployment, which currently stands at 9.1 percent.
Indeed, some experts suggest that the scope of household debt is so daunting that it could produce America's own version of Japan's "Lost Decade --a period following a real-estate bust in the early 1990s when Japan's economy hardly grew at all. The Federal Reserve of New York last month released figures showing overall U.S. household debt at an estimated $11.5 trillion at the end of March this year--a $33 billion increase over where it stood at the end of 2010. The Japanese economy began to stir out of the Lost Decade finally in 2002, when after a series of failed adjustments to monetary and fiscal policies, the country's leaders enacted a thorough reform of the nation's banking industry, according to an analysis from Blomberg BusinessWeek.
"I think we're in for a lot of disappointment," Carmen Reinhart of the Peterson Institute for International Economics, and an expert on financial crises, told CNNMoney.com. "If historic norms hold, deleveraging isn't pretty, and it is not a smooth process. We're already four years into this. I don't think the next six years look great."
What's at the root of the problem? In a nutshell, consumers and businesses took on too much debt--especially in real estate--during the years before the housing bust and the financial crisis. In early 2008, total private debt was nearly three times the size of GDP. It's true that since the recession began, the level of private debt has fallen, as people and businesses have started saving more. but existing debt levels are so high that consumer spending is sluggish, since few people want to spend when they're already in debt. And until consumers start spending again, the economy won't fully recover.
"[B]urdened with underwater mortgages, excessive debt, and subpar saving, U.S. consumers are stretched as never before," Stephen Roach of Morgan Stanley Asia, wrote in a recent note.
Because getting out of debt tends to be a gradual process, there's no obvious quick fix. "The deleveraging process doesn't really get underway quickly," Reinhart said. And unfortunately, that means that, whatever government officials might say, the economy isn't likely to turn around quickly.
The problem stems largely from the housing bubble of the last decade. And the sheer scale of today's household debt epidemic means that it could be a persistent drag on efforts to stimulate broader growth in the economy and to reduce unemployment, which currently stands at 9.1 percent.
Indeed, some experts suggest that the scope of household debt is so daunting that it could produce America's own version of Japan's "Lost Decade --a period following a real-estate bust in the early 1990s when Japan's economy hardly grew at all. The Federal Reserve of New York last month released figures showing overall U.S. household debt at an estimated $11.5 trillion at the end of March this year--a $33 billion increase over where it stood at the end of 2010. The Japanese economy began to stir out of the Lost Decade finally in 2002, when after a series of failed adjustments to monetary and fiscal policies, the country's leaders enacted a thorough reform of the nation's banking industry, according to an analysis from Blomberg BusinessWeek.
"I think we're in for a lot of disappointment," Carmen Reinhart of the Peterson Institute for International Economics, and an expert on financial crises, told CNNMoney.com. "If historic norms hold, deleveraging isn't pretty, and it is not a smooth process. We're already four years into this. I don't think the next six years look great."
What's at the root of the problem? In a nutshell, consumers and businesses took on too much debt--especially in real estate--during the years before the housing bust and the financial crisis. In early 2008, total private debt was nearly three times the size of GDP. It's true that since the recession began, the level of private debt has fallen, as people and businesses have started saving more. but existing debt levels are so high that consumer spending is sluggish, since few people want to spend when they're already in debt. And until consumers start spending again, the economy won't fully recover.
"[B]urdened with underwater mortgages, excessive debt, and subpar saving, U.S. consumers are stretched as never before," Stephen Roach of Morgan Stanley Asia, wrote in a recent note.
Because getting out of debt tends to be a gradual process, there's no obvious quick fix. "The deleveraging process doesn't really get underway quickly," Reinhart said. And unfortunately, that means that, whatever government officials might say, the economy isn't likely to turn around quickly.
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