Submitted by Mark Hanna
Courtesy of MarketMontage. View original post here.
Some interesting data in this relatively short story on Marketwatch, regarding Obama’s comments that we are not a country of deadbeats. Technically… not so much. For example, for every $2 of debt paid off the past five years we’ve defaulted on $3! Keep in mind as we read the data below that we still have the student debt bubble to work through. With the current proposals to allow students to only pay 10% of their income for X years, and then walk away from it all – there is a mountain of defaults to come in the years ahead on that end as well.
- During the last five years, U.S. individuals have walked away from a staggering $585 billion in mortgages, credit card debts and other personal loans. That works out at about $6,000 per household.
- Turn on any news program devoted to the economy and you will doubtless hear some Wall Street blowhard telling you that American households have been “repairing their balance sheets” and paying down their debts. (Mark’s comment: first part relatively true, last part not so much) They make it sound so virtuous, and they often then segue into sneering remarks about those degenerate Greeks and other Europeans who don’t behave in the same responsible way.
- The truth is very different. According to the Federal Reserve, U.S. household debts peaked five years ago at a gigantic $13.8 trillion. Since then it has declined to $12.9 trillion – a decline of about 7%. To put that in context, household debts today still exceed those seen at the end of 2006, near the peak of the bubble. They are three times what they were in 1998.
- Furthermore, as our chart shows, the majority of that reduction hasn’t come from people paying off their loans, but from banks writing them off. The total debt reduction from the peak, says the Fed, is $954 billion. Loan write-offs, at $585 billion, account for 60% of that.
- In other words, for all the chest-thumping about how Americans are repairing their balance sheets and how we aren’t a nation of deadbeats, in the last five years Americans have walked away from $3 in debt for every $2 they’ve paid off.
- Households weren’t alone. Corporations have defaulted on $35 billion to $40 billion in debt per year in recent years, according to Moody’s.
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Any securities mentioned on this page are not held by the author in his personal portfolio. Securities mentioned may or may not be held by the author in the mutual fund he manages, the Paladin Long Short Fund (PALFX). For a list of the aforementioned fund’s holdings at the end of the prior quarter, visit the Paladin Funds website at http://www.paladinfunds.com/holdings/blog
