"Debt is absolutely endemic in our financial system. The
average non-financial corporation in the US is sitting on a debt to equity ratio
of 105%. Bank leverage while relatively low compared to Europe (13 vs.
25) is still high enough that an 8% drop in asset prices wipes out ALL
capital.
The situation is even worse for the US consumer. During the
housing boom, consumer leverage rose at nearly twice the rate of corporate and
banking leverage. Indeed, even after all the foreclosures and
bankruptcies, US household debt is equal to nearly 100% of US total
GDP.
To put US household debt levels into a historical
perspective, in order for US households to return to their long-term average for
leverage ratios and their historic relationship to GDP growth we’d need
to write off between $4-4.5 TRILLION in household debt (an amount equal to about
30% of total household debt outstanding).
Going into this recession, total US credit market debt was at
its highest level of all time: over 350% of GDP. In comparison, during
Roosevelt’s New Deal during the Great Depression we hit only 300% of total
GDP.
This is why what’s happening in the US today is not a
cyclical recession, but a h. And it’s why 99% of commentators and pundits are
unable to grasp the significance of this: it doesn’t fit in their economic
models which only go back to the post_WWII era..."
