So Who Are the Debt Slaves in this Rich Nation?

The American economy has split in two: how averages of wealth & debt paper over the profound risks.

We constantly hear the factoids about “American households” that paint a picture of immense wealth – and therefore a lack of risk for consumer lenders during the next downturn. We hear: “This – the thing that happened in 2008 and 2009 – won’t happen again.”

For example, total net worth (assets minus debt) of US households and non-profit organization (they’re lumped together) rose to an astronomical $92.8 trillion at the end of 2016, according to the Federal Reserve. This is up by nearly 70% in early 2009 when the Fed started its QE and zero-interest-rate programs.

Inflating household wealth was one of the big priorities of the Fed during the Financial Crisis. It would crank up the economy. In an editorial in 2010, Fed Chair Ben Bernanke himself called this the “wealth effect.” So with this colossal wealth of US households, what could go wrong during the next downturn?

Here’s what could go wrong:

About half of Americans do not have enough savings to pay for even a minor emergency expense. The Federal Reserve found that 46% of adults could not cover an emergency expense of $400, such as a broken windshield. They would either have to borrow the money or try to sell the couch or something. So nearly half of the adults in the US live from paycheck to paycheck.

About 15% of American households have either zero or negative net wealth, according to the New York Fed. Negative net worth means they have more debt than assets.

And nearly 47 million Americans, or nearly 15% of the population, live below the poverty line, according to the Census Bureau.

So who benefited from the “wealth effect”? Those who had the most assets. At the very tippy-top: Warren Buffet. At the other end of the spectrum, in 2016, only 52% of households owned stocks directly or indirectly. The phenomenal stock market boom left 48% – usually those below the poverty line, those who cannot cover emergency expenses, those with zero or negative net worth, etc. etc. – in the dust.

Even those Americans with good incomes have loaded up with debt to try to live the American dream. In total, it has led to this situation:

  • Student loan balances have skyrocketed by 160% over the past ten years to $1.4 trillion.
  • Auto loan balances have shot up 42% over the past ten years to $1.1 trillion.
  • Credit card debt and other revolving debt – one bit of good news, to the great desperation of economists who want consumers to borrow more to spend more – has inched up only 7% over the past ten years.
  • And households owe nearly $10 trillion in mortgage debt.

But here’s the thing about those mortgages: About 41% of the owner-occupied homes were free and clear, without mortgage, according to the Census Bureau’s study in late 2016. So the mortgage debt of $10 trillion is actually borne by only 59% of the homeowners. And many of them have paid down their mortgages to a large extent. So a much smaller percentage of Americans carry the lion’s share of that $10 trillion in mortgage debt. That’s where the risks are.

The same with student loans and auto loans: those with the least amount of savings, and the smallest net worth, or those with negative net worth, owe a big chunk of this debt.

Sure, when automakers offer 0% financing on an $80,000 vehicle, a wealthy person with a credit score of over 800 may be tempted to finance it. It’s free money. Those loans are good as gold. But at the low end of the spectrum, there are subprime auto loans, which account for about 22% of total auto loans being originated. And these subprime auto loans that have been packaged into asset backed securities and sold off to pensions funds are now defaulting at rates beyond the highs of the Financial Crisis.

Student loan defaults have reached catastrophic levels. On the surface, the number of people in default on their federal student loans surged 17% in 2016 to 4.2 million, of the 42.4 million Americans with student loans. But the Department of Education conceded in January that it had massively overstated repayment rates. A subsequent analysis by the Wall Street Journal found that at more than 1,000 schools, at least 50% of the students defaulted or failed to pay down debt within seven years.

Default rates for mortgages overall are still low, though they’re inching up. According to S&P/Experian First Mortgage Default Index, the default rate rose from 0.64% in May 2016 to 0.74% in February 2017. And they will remain low as long as home prices continue to rise, as they have been in the US over the past years. In an environment of soaring home prices, homeowners, if they get in trouble, can usually sell the home for enough to pay off their mortgage. Hence defaults are not necessary.

Defaults soar after home prices have started to sink from the lofty peaks that in many cities have already shot way past the highs of the prior crazy house price bubble. At that point, the proceeds from the sale of a home may fall far short of covering the mortgage.

In consumer credit, the risks are concentrated where people have no savings, where credit scores are lower, and where incomes are tight. That’s about half the households. The American economy has split in two, and they’re the other half.

For them, not much, if anything, has improved since the Financial Crisis. They’ve been left behind by the Fed’s wealth effect. But these are very large numbers, and they owe a large portion of the consumer debt, and their finances are fragile, and when the next downturn causes a hick-up in their lives, credit will unravel from the bottom up, as it already has begun in auto-subprime loans and student loans. But the glorious net-worth figures and other aggregate numbers and averages do a great job of papering over the issue.

And there may already be more beneath the surface. Read…  Great Debt Unwind: Consumer Bankruptcies Jump, First since 2010. Commercial Bankruptcies Spike

Enjoy reading WOLF STREET and want to support it? You can donate. I appreciate it immensely. Click on the beer and iced-tea mug to find out how:

Would you like to be notified via email when WOLF STREET publishes a new article? Sign up here.

  93 comments for “So Who Are the Debt Slaves in this Rich Nation?

  1. michael says:

    Leverage can work in ones favor or against you. This economy reminds me of a graduation party with an open bar. You may not pay while drinking but the hang over will be a bitch.

  2. chris Hauser says:

    i like debt, just not too much.

    i like inequality, just not too much.

    jeez, so many scolds, maybe it’s a trend to be reckoned with.

    • Wolf Richter says:

      This is an article about credit risk – where the fireworks will start at the next downturn, how big those numbers are, and what is papering over them.

    • Gershon says:

      Debt is slavery. There’s a reason our oligarch overlords and their Fed cats-paws want us to be hopelessly indebted.

      • IdahoPotato says:

        I have a HELOC from Wells Fargo on my home for the past decade. I haven’t borrowed a penny. It simply exists as an emergency fund if I ever need it.

        Every few months, I get a call from them asking me if I want to dip into it to “go on a vacation” or remodel my home. They even called me TWO DAYS after the giant bank bailout during the Great Recession. They thrive on their customers being indebted.

        • TJ Martin says:

          My favorite pre-2008 story ” they want you in debt ” ( 2005 to be exact ) Absolutely true . When living in New England we had a small mortgage thru … you guessed it .. Countrywide . The home we’d purchased was well within our means and more than met our needs .. and if anything had too much property . Also FYI the CW office was in the city with us being a good 65 miles away .

          So … not more than two months after moving in I get a knock on my door at 3 in the afternoon [ I worked at home ] And lo and behold … who is it but none other than our Countrywide loan officer with a realtor in tow . The CW saying …

          ” Mr Martin .. after reviewing your situation we’ve determined you’re living well below your means [ true .. but .. ] So I’ve brought along Mr X a realtor to take you thru a couple of homes better suited to your financial status ”

          … each one of the homes they had on offer being at least $1 million or more

          Suffice it to say I politely told them they’d wasted their time and gas and no thanks .

        • Valuationguy says:

          You have an undrawn HELOC….which gives you flexibility true….but only up to the point at which the bank worried about your creditability (or their own…in the case of regulatory pressure to limit exposure on their balance sheet). Many of the HELOC are subject to provisions which state that banks can yank the HELOC for any ‘good business’ reason…which might include non-use ($0 outstanding balance=no profit), a life change (loss of employment by you or your spouse), a significant decline in housing prices (not necessarily pushing you underwater), etc.

          The main point being that liquidity provided by these credit lines is most often WITHDRAWN only when it is actually NEEDED.

        • David in Texas says:

          You’d better check to see that you don’t have 2 or 3 HELOCs that you don’t know about. This is Wells Fargo after all.

        • peterpotato says:

          Hi Brother,
          Debt is riding your bike with flat tyres. Peter

        • David says:

          I have a zero balance HELOC with my credit union. They frequently send me checks to draw on the account. They say it for Christmas gifts, vacations, etc.

          The point is that the behavior noted by IdahoPotato is not limited to Wells Fargo. I suspect its due to the business model of lending institutions. I’m a little surprised that this marketing behavior has leaked over into member owned credit unions.

        • alex in san jose says:

          Yergh. The guy I work for has only been somewhat financially prudent because he did a bankruptcy and has been forced to do so. He’s about to be “out of the penalty box” and has all kinds of ways to get into trouble – big house with equity, etc. I’m sure he’ll go from zero savings to an increasing burden of debt in the next couple of years. He’s off on a vacation he can’t afford right now.

      • TJ Martin says:

        Actually debt is first and foremost .. power . And secondly as has been written many times by others here … a money generator [ that one’s beyond my ‘ old school ‘ comprehension but that seems to be how it is ]

        The fact is even many of the wealthiest survive on debt . The one thing Wolf hasn’t delved into which has been revealed to me over the years thru both my CPA and FA is the fact that … many many individuals and families living the highlife are in debt up to their proverbial ears . One of the stunning statistics they both have been passing onto me .. reminding us of how well we’re doing in comparison is that many of their clients [ no names of course ] making much more than we do [ we’re debt free upper middle class six figures income ] have less than a tenth of our overall net worth after debt. e.g. There’s a phalanx of multimillionaires out there with next to nothing in reserve as well .

        Which is to say at least in my opinion .. that debt is a scourge that knows no prejudice and effects anyone and everyone across the financial strata willing to succumb to it . Even some of the billionaire class are riddled with debt to the point should their House of Cards start to fall they’d be crushed under the debris . Scary indeed . With just a wiff of pre -1929 in the air .. growing stronger by the minute … in my opinion .

        • Kit says:

          >There’s a phalanx of multimillionaires out there with next to nothing in reserve as well .

          I know this comes to down to personal preferences, but can you shed light on why? Are they betting on their businesses or just think they are invincible?

        • TJ Martin says:

          Kit – The reasons are numerous . Some are in debt because despite their incomes they’re living well beyond even their high levels of means [ e.g. make a million spend two ] A few have tied their personal debt to their businesses running both in the Red thinking yeah … they’re invincible and their incomes will always rise .. with many [ especially in the billionaire segment ] being mere Paper millionaires / billionaires … having little if anything once debts and assets are tallied up .

          e.g. There’s a whole lot of Smoke & Mirrors / Potemkin Village / Emperors Nee Cloths going on in the upper reaches of society regardless of .. errr .. cough … status etc … more than you’d care to believe .

          The only difference between them and us … is we suffer when the house of cards falls down … whereas they seem to always find a way to carry on SNAFU . Err .. by the way .. a certain someone falls well within that description . wink wink

        • JZ says:

          There are fake ones and there are true M/B people that do appear to have zero savings.

          You should look at their income statement more than their balance sheet.
          Debt may be huge and savings bank account in balance sheet may be small but their asset is large and maybe capital is also large.

          Their W2 has nothing but their other income from 1065,1099 etc is a lot.

          They borrow to control income/cash flow from assets and when assets go bad, they default on that one and due to layers of legal protections performing assets remains.

          So they appear to own nothing in savings but hey do control a lot of cash flows. They do not want to have personal savings because those are less legally protected, if they get sued, their savings will be gone.

        • d says:

          Many of those peopel in debt, living the high life.

          Have that debt, configured in a way they can walk away from and retain all their assets. Without damaging their personal credit references.

          AKA the P 45 clan.

          In alot of other jurisdiction thats fraud in America, its perfectly legal.

    • Kay says:

      Bloomberg had an editorial this morning that mentioned the major reason why retail is failing isn’t totally based on Amazon’s success. It mainly because the majority of American households spending is for basic services. The biggest expenses was health care and financial services (debt) which is 3.1 trillion.
      One problem is the U.S. corporations have to complete with foreign corporations that don’t have to pay for their employees healthcare.Here the U.S. healthcare expenses are going up for U.S. employers so the employers find loopholes to reduce this cost by hiring part time employees. This back fires on the U.S. because when every employer does this nobody can buy their goods. The American consumer runs the global engine.
      I think imbeciles run Wall Street, corporations, Central Banks and the global economy.

      • economicminor says:

        Probably not imbeciles. They are caught up in a game that requires them to do the things you documented in order to survive in business. The problem is that the rules of the game are stacked against the workers/producers. And the math is stacked against us all. Even them!

        The entire problem goes to our endless drive for exponential growth which can not actually happen in a finite system. So those playing the game (running any business in this country) have to do what they can to make up for the fact that the US is a finite system. So in order to continue that exponential growth they have to abandon our borders, abandon our workers and gone global.

        Yet the reality of this world is that the US worker has been the driving engine for consumption for a century. No one else has the space to put all the toys and stuff. China, India and much of the Asia is so over populated that there is barely enough space for all the people and NO space for 4 x 4 diesel trucks to play with or 75″ flat screens or RVs or endless lawns and mowers…. Same in Europe. NO Space.. small apartments and small houses..

        In order to consume you must have money and space. The US workers had both, now they basically have neither. And the US businesses are also struggling to survive. Small business creation is now negative. Fewer new than going under. The only players left standing are the big Multi Nationals and they are dependent upon exponential growth..

        What do you think will be the outcome?

  3. R Davis says:

    The Houses are owned by property investment companies.
    Everyone wants a car .. governments are loathed to spend monies on infrastructure .. adequate public transport is an expensive infrastructure.

    The local eye clinic has borrowed .. they did a nice renovation & enlargement to increase clientele capacity for a bigger profit margin .. yes .. interest free money .. after all .. this free money is being shoved up & down everyone with any sort of potential to borrow or not.
    The problem with the eye clinic is that their eye specialists will not work .. yes .. the patients have left in droves .. shattering the expectations of management.
    Management thought that their lazy doctors would work harder if they were told to .. but guys .. the lazy sods never worked to full capacity in the first place .. the right thing to do was to sack them all & bring in doctors with a good work ethic.
    Now they are in real trouble & interest rates are still 0%.

    Q: what idiotic bank lent these people money in the first place ?

    But this story is the same across the board .. God help us all.

    • R Davis says:

      All the bank had to do is visit the chat rooms to look for bad customer reviews .. it is that easy.
      This place has such a bad rap.
      How much of the blame is due to the banks themselves ?

    • Lotz says:

      I thought it was odd the eye place would be robo calling monthly even though I hadn’t been there for over a year.

  4. economicminor says:

    The way I understand banking, they sell most of the loans in various ways. Many as MBS. The banks make most of their income with charges for loan origination and other banking fees. When the loan origination slows their revenue declines. Although under Dodd Frank they are suppose to carry some of the risk themselves?

    For the TBTF other income is from the derivatives. They insure all sorts of financial shenanigans. They insure them for each other. So they sell a MBS with multiple tranches and they purchase a guarantee of some portion or all and that guarantee is covered by a product we call a derivative. There are other derivatives but they are all basically complex forms of insurance.

    The big problem with derivatives from what I can determine is that there are no hold backs, set asides. For regular insurers, they have to have money set aside for claims. With derivatives there is no claim money and no settlement house. They are very loosely regulated. So they are very mysterious and it is very unclear as to their real fair market value or what happens in a severe event.

    So if defaults continue to increase and loan origination decreases banking will again be in serious trouble. And Derivatives will again be at the center of it. It could easily be the dominos. Last time it almost took out AIG just on the derivatives. It was bailed out by the FED in what many think was an illegal operation.

    • IdahoPotato says:

      Mortgage-Backed Securities are why I refuse to touch “Total Bond Market” Index funds like BND from Vanguard. They have 18% MBS. I stick with Intermediate-Term Treasuries and Corporates.

    • cdr says:


      The derivative is not evil. Futures and options are derivatives. Rather, the goofball who insures the payment if things so south without having sufficient capital is the problem. Especially if they depended on a credit line to make payment and said credit was not available. And the holders they insured depended on payment to make others whole.

      Imagine a car and home insurance company that sold policies without retaining any capital to back up potential claims. Now comes a huge policyholder loss and the insurance company can’t make good. Everyone who held a policy has to cover their own losses. Since most can’t their lenders are left holding the bag along with whoever financed the lenders.

      This is the same as the derivatives market, except some of those goofballs will sometimes essentially bet on which bird takes off first … the one on the right or the one on the left and get others to take side bets while the bookmaker absconds with the cash.

      Or sometimes it’s just a stupid concept, such as a bitcoin ETF.

    • d says:

      Thats it Derivatives are insurance policys.

      Unlike regular insurance policys, you cant check the underwrtiter and in most cases, with derivative the underwriter dosnet actualyl have the cash to cover a claim. At the bottom of a major % of derivative stings, is a total gambler betting there will be no claim.

      A lot of those gamblers are financiall institutions, Who think they can borrow to fund any claims. When D’s are unwinding all over town who is going to step up and finance you to fund D claim’s??????

  5. Nick says:

    I think that the real reckoning is going to come in the next downturn — when so many people are left out of the long expansion, what will happen when the expansion stops? How will pension funds, which are woefully underfunded during the good times, cope with adversity, just as their demographic bulge comes up? I guess these are fairly obvious worries — but no one seems to have any solutions to them.

    That said, I am somewhat skeptical of those surveys that show a huge percentage of Americans have no liquid assets whatsoever. It just seems kind of unbelievable . . . Do they include children in that number? Prisoners? How do people possibly survive in the unforgiving financial ecosystem with no resources?

    • Frederick says:

      They don’t and they won’t Pension funds will evaporate and people will live on less get more self sufficient or perish Simple as that Harsh reality I know but there it is Too much truth perhaps?

    • Kent says:

      Poor folks know a few things:

      1. All you really need is a little food, water and a roof over your head.

      2. Social programs will provide everything above.

      3. If your car won’t start, a friend will drive you or you can take a bus, bicycle or walk.

      4. If you don’t have anything of value, defaulting on a loan has no downside.

      5. Life is easy when you’re not always hustling to keep up with the Joneses.

      • Wolf Richter says:

        I think you forgot the /sarc tag.

        • Kent says:

          No, that’s truth. I played Pop Warner football as a kid in the ’60’s and ’70’s. My dad was the coach. We picked up a couple of very poor african-american kids everyday before practice. We were all good friends.

          Of the 3, 2 went to prison for murder (drug-related) and are out now and in their ’50’s. I still see them out and about, and we get together for beers on occasion.

          Neither can ever consider getting a job. Both told me they get by in the way I stated above. Both can actually get cars at those “we finance” used car places. They get them, drive around for awhile, run out of money and give it back. It’s a way of life.

        • Wolf Richter says:

          It’s pretty courageous to extrapolate from your personal sample (sample size = 3) to the rest of the US population.

        • Colorado Kid says:

          Kent is right. I know a few who live that way and have no intentions of ever living any other way. Many were once what we call “productive” citizens but fell by the wayside with the last crash. None of the ones I know are on drugs/alcohol, though I know a lot of people like this are. One guy is a writer and another a musician and another makes instruments.

          If you don’t own anything of value, getting a judgement against you is meaningless. And ditto with having a bad credit rating – you don’t have enough money to qualify for credit anyway. I know people who, while working and holding down good jobs, had major credit card balances, then lost their jobs and defaulted. Bill collectors are meaningless if you change your address and phone number, and if you rent, you can easily do that. And rent only from private individuals, not realtors who will do checks. Not as hard as some might think, especially in smaller towns. Some live in vans or RVs. These people usually work low-wage temp. jobs, many under the table, that also don’t check your background. No way anyone can garnishee your wages.

          In a way, they’re the only free people in this country in terms of being bound to the credit system. They just laugh about credit scores and such, and some seem to be quite happy. No keeping up with anyone, no pressure, just live day to day, and where I live (Colorado) the health-care system for the poor isn’t really too bad. I know a guy (vet) with PTSD who’s getting therapy through Medicaid, as well as basic dental care (he’s too messed up to hold down a job). When you get old enough, there are some nice old-age apartments one can get really cheap (subsidized). I think they have an OK life, but partly because it’s Colorado and not a big rancid city they’re trying to live in. I wouldn’t want to live like that, but it’s getting more and more common. Lots of old RVs around.

        • economicminor says:

          Western civilization is devolving and people are going back to the old ways.

          Around here it is the same. A lot of people doing their own thing and not paying taxes. Lots of them growing many pounds of pot under the radar and driving nice rigs. Lots of people living in RVs on property. None of this is good for those of us who live here because lots of people without proper facilities means that it is just going on the ground and down the streams. Besides the clutter and trash they seem to collect around themselves.

          Lots of foreign countries like that too. Lots of people, maybe most people around the world do not live with proper modern water and sewer systems. In the cities the crap in a bucket with a plastic bag and pee on the walls.

          Not what I thought the future would be like when I was a young man.

        • Kent says:

          By the way, I assume you’d be more of a 49ers fan than a Raiders fan. However, one of the two guys is Latavius Murray’s dad. Latavius has been a RB for the Raiders for a few years and is starting with Minnesota this year.

        • kitten lopez says:

          thanks, Wolf. sometimes i have to bite my lip til it bleeds to wade through yet more “assumptions”.

        • He Who Walks Behind the Rows says:

          Back in ancient times you could take out a loan with yourself and your whole family as collateral……. to be sold into slavery in the event of default!

        • David says:

          I’m not extrapolating to the whole country but I know and have known a LOT of people who live just like this.

          It’s a minimal existence but it’s what they know.

        • Wolf Richter says:

          My experience is totally different. Sure, there are a few people like that, but I don’t know any. The folks I know – we call them the “working poor” – work incredible hard, and every little thing is very difficult, like child care, getting groceries when there is no decent grocery store anywhere near, fixing that starter on their old beater when they don’t have money to do it but must have the car to go to work. When they miss work because the child gets sick, they don’t get paid … remember, they’re on hourly wages. And forget about “stay at home mom” – that’s a luxury the working poor and many other people simply don’t have. (Some places have paid-family-leave laws, but most don’t).

          There are tens of millions of these people in the US, and life is getting harder and harder for them, and they’re working harder and harder to deal with it. Yes, it’s a “minimal existence,” as you say, but they’re stuck and they cannot move up.

          To blame the working poor in this country that is stacked against the working poor is a favorite but outrageous thing to do.

        • bad economy says:

          I see both now. For years it was people on the hamster wheel, spinning just a little faster each year. It’s changing now. I personally know a fair number of people who have just dropped out and are bartering, growing and canning food, etc. Don’t mistake these folks with those deliberately want to play The Waltons or Little House On The Prairie. These are people who are making due with the very limited choices in front of them.

      • cdr says:

        Hi Kent,

        I was stinking poor as a youth and was surrounded by none to bad role models and bad parenting. I was nearly feral. Not kidding. We appear to be about the same age.

        I turned out OK. So did lots of my friends. A few didn’t but not many. I turned out because I set a goal and aimed towards it. Having no decent role models as a youth negatively impacted me a lot as I grew older but I learned from my mistakes. I managed to keep out of jail and saved enough to retire on. I don’t owe anybody a dime and haven’t for years. I have strong computer tech skills and a visceral understanding of economics, plus a licence in a professional field.

        RE debt: I have little sympathy for people who can’t manage their own situation. These people will learn eventually. Anyone who lent to them knowing the risk went in with open eyes. It’s their problem if it doesn’t work out. Economic failure clears the system. I love a bargain. Your loss is my gain, so to speak.

        Sorry about your friends lives but it’s their problem to work out.

        My issues are with fraud. It’s another thing I have a visceral understanding of … kind of a hobby … watching not doing. Personal debt is naughty. National debt using printed money and monetized sovereign issues are simple fraud on a continental scale. It’s not to be conflated with personal poverty and personal hard times.

        • Kent says:

          Much respect. I said of the three, two went to prison. The third owns his own mobile car-wash business and earns a healthy 6 figure income, has a nice house with a pool, a great wife and 3 great kids.

          He started down the road selling drugs but it just wasn’t what he wanted. He wanted to live how I grew up living. So my father in the end was probably his role model.

          As for fraud, I can honestly say I knew nothing about the banking system in this country prior to the Great Recession. The fractional reserve banking system and the production of any type of CDO is the epitome of fraud.

        • cdr says:

          Hi Kent,

          The complaints about fractional reserve banking are made only by people who think they understand banking but have no clue whatsoever. Others are gold salespeople. The others just throw the term ‘reserves’ somewhere in their explanation that usually ignores inconvenient facts.

          Simply put, banks must lend otherwise they go broke or must charge for deposit safekeeping. You deposit becomes a loan so the banker can pay you interest and make a profit. Your loan becomes a deposit somewhere, some of which will be lent. This goes on and on. Risk management covers the bad stuff than might happen. At this point, the term ‘reserves’ is tossed in by the clueless gold salesman with the hope you think he knows something you don’t know.

          In fact, anyone who claims to be an economic pundit yet complains about fractional reserve banking is hanging a flag on themselves about their cluelessness or making a sales pitch.

        • John Doyle says:

          Fractional reserve banking no longer applies. It’s been superceded by Credit Creation Theory. If the Bank can show it is solvent it can lend forever, [to a borrower]. There has to be a borrower. The bank creates the loan sum out of thin air and writes it up as a deposit in your account. It’s liability money and gets extinguished by being paid back. The interest charged is paid to the bank. The transaction adds to zero, double entry fashion, and does not add to the money supply except temporarily. I wouldn’t say a believer in FRB is clueless. It used to be valid, just no longer.

        • cdr says:


          Also, much of the Great Recession came from borrowers who depended on fake value and then had issues when the fake value disappeared. The rest came from major fraud where ‘insurers’ of exotic financial instruments accepted risk without anything to back up the losses. A cascade loss among many made things much worse … a negative wealth effect.

          Fractional reserve banking had as much to do with it as the average tennis ball had to do with the Great Recession.

        • cdr says:

          John Doyle,

          Funny stuff. Next they’ll be obsessing about left handed money. Trust me, you don’t want banks messing with that. The whole bank scam thing gets exposed once and for all when you listen to a gold salesman talk about it. Run for the hills.

      • Kit says:

        If we’re going to exatropolate on anecdotal data with people with little income, I’d only say #3 is true and it is half-true at best: they rely on each other for rides because they can only afford terrible cars, but none of them can live anywhere near decent public transit. Even the younger ones living with their parents: all of their parents live in the suburbs that voted down public transit.

        Eric lives with his parents, 2 jobs. Is trying to save up to get to a comfortable lifestyle of 1 job, time for leisure, and living on his own. Brandon works 2 jobs. Trying to have health insurance reliably and save up to go to college for stable job.

        Kellie just stopped working 2 jobs – she does make money off her hobby on the side which helped her finally move out to go live with a roommate.

        None of them have any plans to default on a loan and none of them are on any social program unless you count that Brandon went to a local dental school cause he had an infection and needed a root canal (which he waited too long to get cause he was working a hard schedule).

        I won’t say every poor person is working 2 jobs based off those I know. I won’t even say your rules are out of the question – but I’ve just countered your data. Give me better data to support your hypothesis.

      • TJ Martin says:

        Kent and Colorado Kid

        It seems both of you are steeped in the act of stereotyping verging on outright bigotry and racism . As Wolf stated you’re trying to base truth on the personal experience of one individual [ you ] claiming it as fact .. which is in fact no basis for truth or facts what so ever

        Suffice it to say .. yes there are some in the lower classes playing the system for all its worth of all colors creeds and races .. but the fact is … there are many many more working themselves into the ground only needing that one reasonable opportunity to break free from the chains of poverty .. or at least help their children to do so

        And Colorado Kid ? [ a ” Haven ” fan I presume ] … I live here [ Denver specifically ] as well … and sorry .. I don’t know which town or which end of town you’re living in … but from where I’m sitting its wall to wall gentrification with no ‘ subsidized ‘ apartments for the elderly and few if any landlords willing to rent without a verifiable credit check . Without going into detail Colorado is one tough state to be poor in . Seriously CK … get yourself out onto the streets and take the time to meet and get to know those less fortunate than you . You’ll be surprised despite the poverty the level of dignity and work ethics you’ll come across if you do

        • Colorado Kid says:

          TJ, I live an hour from Vail. I know a lot of old ex-ski bums who fit my supposedly racist stereotype well (BTW, they’re all white).

          I’ve lived with the rich and the poor. It seems to me that those who have dropped out of the system are generally happier, even though poorer, as they feel like they have the freedom of time and of making their own decisions. Note that the operative word here is dropped out, which means they may have been forced into this lifestyle but then chose to stay in it. I’m not talking about the working poor who are barely getting by and have families and huge debt and work themselves into the grave. I’m talking about people who prefer this lifestyle to working a real job. They work, but on their own terms in part-time jobs or doing things like handy-man jobs. These people exist all over the West Slope, which is a different world from the Front Range (lived there for 17 years, but am a W. Slope native).

          I have no idea what a Haven fan is, as I don’t watch sports or TV. I said nothing to denigrate these people, many of them are friends and I’ve been close to that scenario myself. The hardest working people I know are Hispanics – call me racist if you want, but it’s true, and I mean hardest in that they make up the majority of the menial labor type jobs here. The ones I know are generally great people, as are most people on this planet. I once owned a landscaping business and can personally attest that they are hard-working people with little to no sense of entitlement.

          And if you look at the stats for Colorado, it comes in pretty high on medical care for the poor. Having lived in Utah also, I can verify that Utah isn’t nearly as close for medical care. Colorado is one of the few states I know that has a gap program for seniors who hit 60 and are low income. It will provide $700 month MOL until you’re 62 and can collect SS.

        • kitten lopez says:

          thank you, TJ Martin.

        • kitten lopez says:

          and thank you, too, Colorado Kid.

      • alex in san jose says:

        Ken you’re describing me post-2008.

        At one time I had an apartment, a small business, a Prius, I was doing all the “productive member of society” things.

        The crash put an abrupt stop to that.

        And all the thing you say are true. I don’t take loans, but if I did, meaning someone was dumb enough to loan to me, I could forget about paying them with no repercussions.

        I don’t even worry about my credit rating, and don’t know what it is.

        I ride a bike, or take the bus, and once in a great while will depend on a friend or a cab.

        I don’t use any social programs other than Obamacare/the don’t-get-sick health plan (I don’t smoke and I try to keep myself in decent shape). It doesn’t take much work to come up with money for food, drinking water, $15 a month for my cheap flip phone, etc. Fixed expenses scare me so no fancy smartphone with a plan, no gym membership, etc.

        Life is indeed a hell of a lot easier. It’s a wild ride, losing everything, but once you get over the shock it’s really pretty nice.

        (I have not, nor do I recommend this) You can live OK in the US without ever holding a job if you live in a modest cost-of-living area with lots of family and friends around. You’ll do lots of work on a casual basis, lots of favors get exchanged, and it’s amazing how well things work out. People from groups who are more used to being on the bottom tend to make this work out better than whites in the US.

    • Another World says:

      Nick- I’m one of those people with less than $500.
      Have a $415K mortgage, which ends this week when the sale closes. I’m self employed & very good at my work….but the laws of my state prevent me from working as I could. I’m shopping for a new location. The US can’t be saved by “innovation” because the feds and states have blocked most of the newly developed technologies by talented individuals, including health, food, products and services. The top-down control stifles everything.
      Probably my only real chance at prosperity is outside the US.
      What I see is that the US is going Third World right now….people are sick, dependent and unconscious of what’s happening to them. But those of us that could help aren’t allowed to. We get cease & desist letters because our work is outside of big pharma or big business.

      • Frederick says:

        Another world That’s exactly what I did and how I felt about my home country sad to say I was running on the hamster wheel to pay all the bills and one day decided to try life in Turkey ( my wife’s home country) Have no debt just bought a lot 500 meters to the Med with a gorgeous mountain view and have an architect preparing plans for our new home I’m thinking of buying a lot across the stream for a small organic farm New car paid cash NO more debt for me If I can’t pay cash for it I don’t want it Good luck to you

      • Cities Data says:

        You paid $415k for @#$%ing house? Have you lost your mind?

        • TJ Martin says:

          In Denver ( as well as many other cities and urban areas ) $415k has become a bargain for a single family home within the greater metro area

        • azdude says:

          That should explain why housing demand is at 20 year lows.

          If anyone thinks that’s a bargain they need their head examined.

        • Anon says:

          You’d be lucky to find anything better than a tear down for $415k in the Seattle area.

          Now imagine being a first time home buyer. You see how the Fed has rigged the game to benefit boomers who own homes & financial assets, rather than millennials just getting started. All asset prices have been inflated out of reach. I’d love to buy a house, I also do not want to be an over-leveraged debt slave for the next 30 years.

        • Lee says:

          Move to Oz and see what $415,000 will buy in Sydney……


          In Melbourne that will get you a small house on 1/10 of an acre lot an hour or more by car during off peak time from the CBD.

        • azdude says:

          Well I’m here in Seattle and for sale signs are everywhere. And I don’t see much selling either.

      • TJ Martin says:

        My first question would be what exactly is your business / occupation ?

        The second would be how exactly can your skills / business help fix the situation and what laws are blocking you from doing so ?

        The third being … don’t you think calling the mess we’re in a Third World is overstating the case to the point of blatant hyperbole ?

        And lastly . Do you really think any other state never mind anywhere else including another country would be one bit better than where you are now ?

        Not to burst your bubble and make no mistake I DO think things need to change here but … although we ( US ) are a mess … we’re still the best mess there is .

        In conclusion : I get the definite impression you’re of the ” Grass is Greener ” crowd deeply steeped in ” Culture of Complaint ” [ by Robert Hughes ..take the time to read it ] rather than looking at things as they are desperately seeking a scapegoat in oder to mitigate your responsibility / culpability

        • Jerry Bear says:

          Hee hee! What a mountain of conjecture you erect on such a slender foundation of fact! Me thinks thou dost protest too much.

    • Bobber says:

      Nick, there would be a depression or reckoning only if the current system stay in place, and that may not happen. Obviously, a form of debt jubilee would eliminate all problems for debtors, and it might be viewed as manageable for savers because they have excess capital (that they don’t need). While a debt jubilee isn’t in today’s plan or today’s mindset, it would prevent a depression.

      I don’t think society at large will allow a depression to happen, where the top 1% live high on the hog while the overwhelming majority of the population eats crow and suffers never ending austerity. When times get tough, I think they will change the rules. They are doing it already. Who would have thought 10 years ago the Fed would be printing endless money?

      I’m not in support of any of this. I think society needs reliable laws to function and plan for the future.

    • PrototypeGirl1 says:

      How about the one where most Americans have only a three day supply of food, no savings, and a preference for chemical / procedure health care. It’s bizarre. All of it.

  6. RD Blakeslee says:

    As usual, there are ways to take what you might call “micro-advantage” of the macro financial situation.

    Our beloved, 19-year-old Suburban gave up the ghost.

    The Macro situation: Carmaker’s are desperate to sell their bloated inventories ( ) and the Fed has kept interest rates artificially low so cash savings are shrinking in value.

    Having plenty of savings, we bought an automobile financed for 48 months at zero percent interest (even the titling tax and license plates were included) and we will pay off the loan from the savings.

    • Paulo says:

      Good one RD.

      We are waiting until the same thing happens to us before purchasing. It may be years, though. :-)

      The funny thing about new cars, even new/used cars. It’s kind of exciting for a few days, then turns to just nice, and after a couple of weeks you notice the noises at a certain speed, a few rattles or flaws, then it’s just your ride. And that is the plus side. I know people who have bought lemons and it is life changing negative.

      I am doing a big reno right now. I often have CNN on in the background to catch the current propaganda slants. The adds that come on are usually medications for aging people, credit scores, instant mortgage approvals online, and insanely expensive cars. A pill to get an erection, control diabetes or manage aheart problem. People maximizing credit options so they can buy something right away, perhaps even buying a bigger new home or one they can’t really afford, and reverse mortgages so they can get off the hamster wheel and maybe afford health care. The car seems to be the ultimate new ride to you have self worth and admiration of others. Nuts.

    • kam says:

      “when automakers offer 0% financing on an $80,000 vehicle, a wealthy person with a credit score of over 800 may be tempted to finance it. It’s free money. ”

      Zero interest just means the price of the vehicle contains the interest, implied or not. Bump the price to $90,000 and you can offer negative interest rates.

      • RD Blakeslee says:

        Not necessarily.

        The automakers are currently hurting with huge unsold inventories and their discounts are genuine.

        these are often offered as either favorable financing or cash back.

  7. r cohn says:

    Among OECD countries ,the US has the 4th highest GINI coefficient(a measure of income equality)

    The policies of the Central banks have exacerbated this inequality,yet those policies just continue.
    The tax cuts proposed by the Trump administration will mainly benefit those high income,high net worth individuals.Tax cuts for corporations will mainly benefit these same individuals.This should surprise no one ,since Goldman Sachs is overly represented among Trump’s cabinet members.

    The greed of the very rich has no limits..Who the heck cares that the US produces so many billionaires?
    Look at the takeover of Heinz by Warren Buffet and 3G.More money for both and cost cutting(layoffs) for the employees.

  8. Dave B. says:

    It all comes back to the “overthrow” of 1913 !

  9. OutLookingIn says:

    How can broke banks lend money to broke people who haven’t got any money, because they can’t pay back the money the broke bank lent to other broke people and shouldn’t have lent it to them in the first place, because the broke people can’t pay it back?
    – With thanks to Clarke & Dawe RIP Dagg

    • beadblonde says:

      According to Geithner, the broke banks periodically need rescued. This should happen about once a decade. The technocrats can print some trillions and cover up any trouble. True, the technocrats might miss some deleterious effects on the people who don’t matter but otherwise the system continues if macroprudentially managed. It is a poorly understood feature of technocratic democracy that outraged voters are utterly unable to intervene.

  10. unit472 says:

    I’d guess that the modest rise in credit card debt owes to two factors. #1 a lot people don’t have one after they defaulted during the 2008 to ? Depression hit. I don’t get the same flood of card offers in the mail as I did back then.

    The other factor is those who still have credit cards realize how important they are and husband their purchases with them so they will have ‘credit’ when the need really arises. If you don’t have the cash to pay for a essential car repair you’d better have a credit card or a brother who has an auto repair shop!

  11. Ishkabibble says:

    Do movies imitate life, or does contemporary life now imitate the movies? Regardless………….

    You decide for yourself if Martin’s character’s assertion is true. Although the following movie excerpt describes the relationship between banks, arms, wars and debt, starting at 1:48, the purpose that IMO debt “plays” in everyday society becomes clear.

    In our perverse, ultimately suicidal political/financial/economic system, one person’s crushing debt is another person’s or corporation’s income and a bank’s investment/asset.

    When, not if, the next “like an asteroid from outer space” “financial crisis” (another potential collapse of the Elite’s “systemically important” institutions that will purportedly end the wonderful “global liberal world order” ) INEVITABLY comes to pass, all of the potential losses on these “investments” will, yet again, be put in a nice comfy safe “place” by the Fed where they can be safely “managed”. Then we can carry on the very same insane system/cycle as usual.

  12. HudsonJr says:

    And with each large large downturn the gap gets larger. The poor move further down, if there is anywhere down to go. The middle get their savings or retirement plans eaten away as they try to keep their day to day ship afloat when they lose a job.

    The upper-middle can go either way depending on whether they keep their jobs/earning power throughout the downturn.

    The upper class have a chance to profit via shielding their assets against the downturn as well as having buying opportunities via a crash. Even just keeping the “status quo” works out for them.

  13. kitten lopez says:

    where oh WHERE IS PETUNIA?!

  14. JZ says:

    Question “who are the debt slaves?”
    Answer “Those who are responsible for the debt”

    Rich people have lots of debt, true.
    Poor people have lots of debt, true.

    Why the rich are NOT slaves while the poor are?


    Debt is the name of the game in wealth transfer. if you feel confused, do not worry. it is the way it is since that’s how they transfer your wealth into their hands.

    Not only your personal debt make you a slave, even your income is a result of rich people’s debt.

    Imagine TSLA can not borrow and build stuff and create jobs and pay people salaries as their income.

    So what’s the difference between TSLA’s debt and your mortgage? When TSLA go bust, Elon walks. If you can not pay your mortgage, you lose your down payment and years of payment.

    Elon is he master, you are the slave.
    And the slaves can not let depression happen because it is bad for society. So Elon keeps borrowing and create jobs.

    And finally, all of those artificially created jobs will turn into malinvesrment because the product is NOT what market want and has limited utility. By that time, the wealth transfer has been done. Banks will fail and slaves will come in and save he banks because depression is NOT allowed.

    Money printing ensues and Elon starts to borrow and create jobs again.

  15. cdr says:

    Re: Ben Bernanke and the wealth effect:

    I understand his objective: Add stimulus to raise valuations while pumping the economy with monetary growth. Wait for growth to match raised valuation. Declare success and remove stimulus. Hooray!

    Things didn’t work as theorized. As adjusted, now the goal is to chip away at stimulus and hope to not cause a rapid deflation as loans are slowly repaid. Err on the side of cowardice and make up theories / excuses / whatever as needed. Make it up as you go along. Don’t offend anyone important, especially if the wealth effect will be impaired.

    The results: Eviscerated savers who would have spent interest income and added to actual growth. Massive debt caused by scammers who saw a way to use borrowed money to pump valuations long enough to get rich. Others are responsible to pay it back. Debt levels not supported by income levels. Public officials who are happy to keep it going month to month.

    Note to future Bernanke wannabes: Money is the lubricant only. Interest is the cost to use it. Lowered rates are a sale no different from a sale at a store. Turning the central bank into a discount store is a bad plan. It screws up everyone in uncountable ways for the very long term.

    • JZ says:

      You know the politicians are lying when their lips move. Same apply for Bernanke.

      What ever objective they are telling you, ignore it. The have only 1 objective. Facilitates wealth transfer for who ever owns them.
      While it appears they have failed their objective in theory and look stupid, they have achieved the true objective.

      Many folks are thinking the economy is wealth creation and there should be sound rules to ensure the efficiency of the creation part. Honesty, fairness, working ethics are all of it. Bad news, while you are thinking about wealth creation, Bernanke is actually doing wealth transfer.

      Those who understands this will never save, they will use debt to transfer wealth.But they fail to understand that when you go to poker table to do transfer, only 1 guy wins. This is the inequality.

  16. Gershon says:

    Despite the incessant jawboning from Yellen’s flying monkeys about a supposedly pending series of rate hikes, the Fed is predictably using “the data” to justify its continued bilking of savers and the prudent out of hundreds of billions of dollars a year in interest income by keeping rates artificially low. Once again, with feeling: Yellen will NEVER raise rates of her own volition, as near-ZIRP rates are the Wall Street-Federal Reserve Looting Syndicate’s most lucrative swindle against savers.

    • d says:

      The FED wants to clear its balance sheet of toilet paper, before it truly gets serious about rasing rates. As there is no buyer for much of it, they are waiting for the maturity dates and simply declining to roll.

      Doing this has a simular effect to rasing rate without hurting the state as it reduces bank asset ratios, increases the FED cash on hand, and slowly reduces the paper fueling bubbles.

      • economicminor says:

        The FED rolling out of their assets seems to me would put the new ones created on the market, in the market.. There has to then be buyers.

        So the game today is that the interest rates are declining meaning there are more buyers than sellers. So the FED can unload.

        And if stocks look risky, then the money moves into bonds and the FED can unload without a big loss or any loss.. So the best scenario is for stocks to grind down slowly and let the market buy up the FEDs balance sheet. Correct?

        The BIG risk to them is a stock market crash which basically just wipes out capital and leaves them with a bloated balance sheet. A stock market crash could easily put pressure on corporate revenues besides wipe out many VC funded enterprises.. This could then put upward pressure on interest rates as bonds get defaulted upon.. And screw the FED.

        As the US deficits are still high, this would also put pressure on the federal government because now the FED is in trouble and unable or unwilling to increase its balance sheet. Yet this would drive interest rates even higher as less money and more demand for bond sales as corporate bonds become under pressure from some starting to default. So the FED would be forced to increase its balance sheet to defend itself.

        Is this the dilemma we are in?

  17. BRF says:

    In a capitalist economy debt is the driver of the economy. If that debt is financing healthy productive enterprise this is to the good and will be repaid with the economic growth-wealth creation. If debt is used for mere speculation on assets we have a big problem as who is going to be able buy at the inflated prices if their income is not also inflated and remains stagnant? Private debt to GDP, while slightly down from pre 2008 levels, where it reached 170% of GDP, is still too high to support a consumer driven economy and we all know who is to blame for the expansion of easy credit and the lifting of controls on the movement of capital internationally, beginning in the mid 1970s. Pushing debt is why bankers get up in the morning and the economy as a whole gets to reap this whirlwind. Meanwhile the austerity ghouls decry a government debt of about 100% of GDP forgetting that government, besides banking and banksters, is the only other way that money can be supplied to the economy under the present system. The economist that bankers employ pronounce a lack of population growth and a lack of innovation as the culprits while entirely ignoring the effects of banking, debt and even money’s influence on a capitalist system that is inherently unstable.

  18. azdude says:

    Isn’t it crystal clear to everyone by now that the debt slaves are those who bought a house in the last 18 years?

    • JZ says:

      Disagree. It all depends on how you pay your mortgage. If you use your W2 to pay for it, you are the slave. If you use somebody else’s W2 to pay for it, somebody else is the slave.

      • azdude says:

        Given the fact housing prices have been elevated 300% higher than long term trend and double construction costs for nearly two decades, “how you pay for your mortgage” has little to do with anything. In fact if you borrowed, you doubled down on those losses.

        • JZ says:

          Your valuation method may or may not make sense, and future will tell. But that’s NOT the point or focus of this discussion. This discussion is NOT about whether you make or lose money, this discussion is whether you are the slave because of the debt you borrowed. You may lose money but that does not mean you are the slave. You may borrow zero with debt free, but rent can still own you.

        • azdude says:

          “Valuation method”? LOL

          The price is the price my friend.

          And the fact remains millions paid massively inflated prices for a depreciating asset, in this case a house and then doubled down on those losses by financing.

  19. Julie says:

    I really enjoyed the digressive accounts of poor people having it all. Who doesn’t need reminding, from time to time, that there is freedom at the bottom? Particularly when these narratives begin with “I know a guy” let me tell you, I’m all ears. Whether it’s relevant to the topic at hand is quite beside the point. I myself have depended on the kindness of strangers! Fear not! Though it might be trivially true that the very poor possess an advantage of having nothing to lose, we must not condescend. It brings to mind the first time I went bowling as an adult. Once you’re there, and rolling, it’s not that bad.

  20. Nexus789 says:

    Some old story. Wealth concentrates where wealth already exists without checks and balances. The Fed policies have merely increased this to a point the will system collapse as society cannot function when a significant percentage of the population becomes economically non -viable.

  21. Ambrose Bierce says:

    Actually I think you are making the point that the system is more stable than it seems. If most of the debt is in a few hands the government can target the demographic. If debt becomes pervasive there is no one policy fix. CBs try to spread risk. If DB gets in trouble GS, CITI and MS buy up their derivatives. So as long as credit risk isn’t pervasive, the CBs can remain on the sidelines, and its been a long time since anyone had to say, we’ll do what it takes. If you are in the WH, you issue direct stimulus to low income consumers and take a victory lap.

Comments are closed.