As we begin 2011, I've spent some time reflecting on 2010 and the current status of the US economy. It would appear we are turning the corner and things should pick up. The stock market finished 2010 up 11%. Today the Dow is at a high since August 2008. But when you step back and look at where we are you get a little different picture. Take a look at the graph below. This isn't a graph of the stock market - it is a graph of amount of US debt in billions of dollars since 1980. George Soros calls it the "Super Bubble"
Something very important happened in September of 2008 when Lehman brothers failed and the entire US financial system had to be bailed out by the US government. We realized that the graph above is not sustainable. The government (and the Federal Reserve) has taken massive and unrepresented steps in attempt re-flate it. But if history tells us anything, it is just a matter of time before all bubbles burst. Let me show you a couple similar looking graphs from history and how they finished.
Here are a few that are a little more recent.
And of course the dot.com bubble
And if you are interested here are a few more.
Alright, now look back at the first graph of debt growth in the US. Consider the effects on the economy as we slip down the other side of the slope (reduce the unprecedented amount of debt). The average US home price was $80k in 1980 before we experienced the massive debt accumulation. In 2006 it was over $300k, right now it is $268. Where will it be a decade from now? I would put my money at a price closer to long run averages. Think about all the "wealth" created from this debt accumulation. US homeowners have already lost 9 trillion in home equity since 2006.
What is potentially alarming is if unemployment stays a current levels what will happen to mindset of middle America as it relates to debt. Consider a scenario where people begin having strong risk aversion to debt (or worse hatred of it) and we slide much faster down that slope.
No comments:
Post a Comment