As the months go by and I witness the lengthening recession, things come more sharply into view.

This economy is going to take a decade or more recover into anything resembling the term “robust”. Why? Simple: the mortgage became the ultimate credit card for addicted consumers.

Case in point: My buddy just bought a house in a short sale for $800,000. The bank loans totaled $1,250,000, and the prior owners purchased the home for $300,000. Think about it – the prior owners took out almost a million dollars and poured it into the economy at the sake of their future! This might be an extreme example, but what about the average Joe that was able to tap $50,000 or more? It would take about $80,000 in real taxable earnings to generate that sort of cash.

Average Joes don’t get credit cards with $1,000,000 limits. Or $50,000 limits, for that matter. But homeowners did. Couple this with the fact that US Consumer Debt  rose from about 95% of household income to over 130% of household income from 2000 to 2008, and you had what I call the “illusionary economy”. Spendable “wealth” was tapped from two places:

• Home equity
• Consumer debt (credit cards and the like)

Neither of these are spurred by earnings and both of them encumber the consumer’s future for the sake of spending today.  This provided the primary fuel for the economy up until housing’s big fall. And it’s going to take a really long time for earnings to catch up in a manner that will provide for mass spending – if at all.

The illusionary economy consisted of the transfer of money from banks and other creditors to the consumers, who then poured the cash into products and services. And the banks and homeowners that are now underwater are left holding the bag (that is – if the homeowner doesn’t walk away and toss the keys to the bank).

I don’t think it takes a rocket scientist to figure what what’s going on here. If you are smart, you won’t ever crack your wallet by diving into debt again. Ever.

And for whatever pain that brings us, I say so be it. We’ll be better off for it.

Now if only “we the people” can find some folks to vote into office that think the same way……..

This entry was posted on Wednesday, August 11th, 2010 at 10:11 pm and is filed under Main. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.