U.S. Debt Options of Default or Hyperinflation

Interest-Rates / US Debt
Sep 29, 2010 - 04:08 AM

By: Graham_Summers

The big financial myth-buster of the week is that the alleged deleveraging of the US consumer has in fact been a giant myth. According to the Wall Street Journal, if you account for defaults, US consumers have only pared down their debts by an annual rate of 0.8% since mid-2008.

The Journal writes (emphasis added):

Over the two years ending June 2010, the total value of home-mortgage debt and consumer credit outstanding has fallen by about $610 billion… Our own analysis of data from the Fed and the Federal Deposit Insurance Corp. suggests that over the two years ending June 2010, banks and other lenders charged off a total of about $588 billion in mortgage and consumer loans.

That means consumers managed to shave off only $22 billion in debt... In other words, in the absence of defaults, they would have achieved an annualized decline of only 0.08%.

This is a major deal-changer for the US financial system. For months we’re been hearing tales of consumers are doing the right thing by paying off debts and living more frugally. While this is true for some consumers, the Journal’s article makes it clear that the vast majority of folks are simply spending until they’re officially bust and have their credit lines pulled.

Whether this is because Americans are stuck on a “buy ‘til you’re bustâ€