After the Debt Feast

The front page of the New York Times business section recently had a piece entitled, "After the Debt Feast Comes the Heartburn," by Gretchen Morgenson (11/27/05). It features a synopsis of research findings by Paul Kasriel, chief economist at the Northern Trust Company in Chicago, who says "We have the most highly leveraged economy in the postwar period." He's not talking about the Vietnam police action.

Kasriel isn't a lone voice. Paul Krugman, whose specialty is international economic stability, likens the US to a Latin American economy. Many will counter that by citing the size of the US economy; however, as the saying goes, "The bigger they are, the harder they fall," and US production of tangible goods (manufacturing) has declined drastically over the past few decades. General Motors is going to shed about 30,000 jobs (check fact) in the next few years, and this will have a ripple effect to other jobs. Krugman's concern has led him to personally change his behavior; he has changed his adjustable mortgage to a fixed mortgage. I have too.

Kasriel includes real estate in his short list of concerns: rising interest rates, record consumer debt, and a cooling housing market. It's cooling in Baltimore despite the Washington DC pressure. This list doesn't even include government debt, international trade debt, and the lurking concern that much of this debt is not being invested in creating productive capacity to grow the economy. Rather, it is being consumed in the form of consumer products bought from China, military hardware, salaries and veterans benefits, and luxury goods being purchased by the wealthy 1-percent who have received windfall tax breaks over the past few years.

Kasriel thinks the party is coming to an end, and that the record consumer debt, combined with new a bankruptcy law, could turn an economic recession into an "accident." It was, in part, excessive leveraging that caused the crash of 1929. But at that time, the US was not in debt to foreigners.

Of course, those who anticipate and prepare for an accident can fare well. More can be said.