Here Comes the Next Crunch

Anyone else like charts?  I do.  Charts tell stories that I can “see.”  Call it a throw back to my automotive market analyst days, but seeing numbers laid out on a chart tell me many things.

I don’t like this chart.

That chart is the Household Debt to Earnings Ratio.  Per the comments from the original article from the Harvard Business Review’s Editors Blog, the debt shown above also includes household mortgage debt.

How to slice the the blame pie is good fodder for debate — but beside the point. The article makes it plain: We’re all exposed now.

Why don’t I like this chart?  There’s a cliff…

Cliffs typically mean that there’s a big drop-off coming.  When we’re talking about debt to earnings, cliffs don’t look like fun…and this one won’t be.  The graph shows that we’ve leveraged ourselves OVER what we earn in a year.

The top number there, 1.30, means that it would take a household nearly 16 months to payoff their current debt if no further debt is incurred and income remains the same.  That cliff tells me we are in for a readjustment in the future.  My gut tells me it’s the not too distant future, but that’s up for debate.

The drop is going to be when the banks decided that they would like their money, and consumers say, “Sorry, we got none.”  While it will be good for us to finally get back to living within our means, that drop is going to smart!

Will The Drop Actually Occur?

That’s the $24 question.  With today’s current political climate, the realist cynic in me says, “No way!” I can’t imagine ANY, let alone this, administration allowing such a massive world of hurt descend on it’s citizens.  Unfortunately, the cynic in me also sees the Gub’mint descending on the lending institutions to “level” the playing field.

So what will actually happen?  My guess is that at the end of the day/bottom of the cliff, the political powers that be will strong arm businesses into making things easier for the over-leveraged citizens.  This will result in further take-overs of private industries or at least some businesses within private industry… enter General Government Motors.

With consumer spending being seen as THE solution to the current economic debacle, it seems to me that we will never get back to the family friendly and secure debt to income ratio below .90.  Our “leaders” along the Potomac will run, duck and cover to save their power base, ensure their re-election, but likely never make the hard decisions necessary to put American families and businesses on a more secure economic footing.  To do so would be to anger, and alienate everyone addicted to “the credit.”

Fiscal responsibility ain’t just two words…

[h/t @lindastrasberg]

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