Wolverine
21 Jun 2004, 08:01 AM
We're awash in debt. Does that spell trouble?
By MATHEW INGRAM
From Saturday's Globe and Mail
Household debt levels in Canada and the United States are at record highs, and are continuing to grow rapidly. Is that a dangerous sign of financial instability and underlying economic weakness? U.S. Federal Reserve Board chairman Alan Greenspan says it isn't — but others disagree. They say the impact of rising interest rates on that mountain of consumer debt could well have severe repercussions for the economy.
A look at debt in Canada and the United States reveals some eye-popping numbers: In both countries, the level of debt to disposable income is at about 115 per cent, meaning residents owe more than their entire available annual income. A decade ago, that ratio was closer to 85 per cent, and even as recently as three years ago it was less than 100 per cent.
Rather than scale back consumption during the recent economic downturn, consumers took on debt at an unprecedented rate — and that has continued, despite the promise of higher interest rates. In the first quarter of 2004, U.S. household debt rose at an annual rate of 10.9 per cent, the second fastest in 15 years. It has risen by 30 per cent since 2000 to $9.4-trillion (U.S.).
The primary engine for this has been record-low mortgage rates, which have driven a refinancing boom in the United States and to a lesser extent in Canada. That, in turn, has poured billions of dollars into consumption of all kinds, including house buying. And the main driver behind low mortgage rates, of course, has been the lowest interest rates in half a century.
Not surprisingly, considering the Fed has been the central architect of this "easy money" policy, Mr. Greenspan says he isn't concerned about high levels of household debt. He and others argue that it isn't a problem because most of it is mortgage-related (about 70 per cent in the United States and about 60 per cent in Canada). In other words, it is backed by a hard asset, and one that has been increasing in value.
But investors such as Bill Gross of Pacific Investment Management Co. of California — whose bond fund is the largest in the world, with $400-billion in assets — say they are worried that Mr. Greenspan is being a little too sanguine about the risks posed by household debt levels. One problem is that the rise in asset values that justifies all that mortgage debt is in part a byproduct of that debt. In other words, house prices have been rising in part because consumers are taking on more debt to pay those higher prices.
The risk is that as interest rates rise, that cycle gets unwound, something that could cause severe pain to consumers who are overexposed.
While most mortgages are at long-term fixed rates (80 per cent in the United States), the number of adjustable-rate loans has been growing at a rapid pace, to the point where they now account for close to 30 per cent of new mortgages in the United States.
Mr. Greenspan may be calm, but his British counterpart — Bank of England governor Mervyn King — raised a yellow flag this week about the risk of high mortgage debt. "When people take out very large mortgages ..... stretching themselves to the limit in the belief that house prices will always go up to bail them out — that's a slightly risky assumption to make," he said.
In his confirmation hearing before the U.S. Senate this week, however, Mr. Greenspan said he was "not actually concerned at this point that we are looking at a real serious consumer debt problem," because mortgages add an asset to consumer balance sheets and delinquency rates are low. The Fed chairman says debt levels should be less of an issue as the economy grows.
The fact remains, however, that U.S. household debt has risen twice as quickly as household income has over the past three years, while mortgage debt has soared by almost 50 per cent. That may have helped the U.S. economy through the recent downturn, but it still represents a very large bill that will have to be paid — and the cost of paying it is going up.
http://www.globeandmail.com/servlet/story/RTGAM.20040619.wmath0619/BNStory/Business/?query=%22consumer%20debt%22
By MATHEW INGRAM
From Saturday's Globe and Mail
Household debt levels in Canada and the United States are at record highs, and are continuing to grow rapidly. Is that a dangerous sign of financial instability and underlying economic weakness? U.S. Federal Reserve Board chairman Alan Greenspan says it isn't — but others disagree. They say the impact of rising interest rates on that mountain of consumer debt could well have severe repercussions for the economy.
A look at debt in Canada and the United States reveals some eye-popping numbers: In both countries, the level of debt to disposable income is at about 115 per cent, meaning residents owe more than their entire available annual income. A decade ago, that ratio was closer to 85 per cent, and even as recently as three years ago it was less than 100 per cent.
Rather than scale back consumption during the recent economic downturn, consumers took on debt at an unprecedented rate — and that has continued, despite the promise of higher interest rates. In the first quarter of 2004, U.S. household debt rose at an annual rate of 10.9 per cent, the second fastest in 15 years. It has risen by 30 per cent since 2000 to $9.4-trillion (U.S.).
The primary engine for this has been record-low mortgage rates, which have driven a refinancing boom in the United States and to a lesser extent in Canada. That, in turn, has poured billions of dollars into consumption of all kinds, including house buying. And the main driver behind low mortgage rates, of course, has been the lowest interest rates in half a century.
Not surprisingly, considering the Fed has been the central architect of this "easy money" policy, Mr. Greenspan says he isn't concerned about high levels of household debt. He and others argue that it isn't a problem because most of it is mortgage-related (about 70 per cent in the United States and about 60 per cent in Canada). In other words, it is backed by a hard asset, and one that has been increasing in value.
But investors such as Bill Gross of Pacific Investment Management Co. of California — whose bond fund is the largest in the world, with $400-billion in assets — say they are worried that Mr. Greenspan is being a little too sanguine about the risks posed by household debt levels. One problem is that the rise in asset values that justifies all that mortgage debt is in part a byproduct of that debt. In other words, house prices have been rising in part because consumers are taking on more debt to pay those higher prices.
The risk is that as interest rates rise, that cycle gets unwound, something that could cause severe pain to consumers who are overexposed.
While most mortgages are at long-term fixed rates (80 per cent in the United States), the number of adjustable-rate loans has been growing at a rapid pace, to the point where they now account for close to 30 per cent of new mortgages in the United States.
Mr. Greenspan may be calm, but his British counterpart — Bank of England governor Mervyn King — raised a yellow flag this week about the risk of high mortgage debt. "When people take out very large mortgages ..... stretching themselves to the limit in the belief that house prices will always go up to bail them out — that's a slightly risky assumption to make," he said.
In his confirmation hearing before the U.S. Senate this week, however, Mr. Greenspan said he was "not actually concerned at this point that we are looking at a real serious consumer debt problem," because mortgages add an asset to consumer balance sheets and delinquency rates are low. The Fed chairman says debt levels should be less of an issue as the economy grows.
The fact remains, however, that U.S. household debt has risen twice as quickly as household income has over the past three years, while mortgage debt has soared by almost 50 per cent. That may have helped the U.S. economy through the recent downturn, but it still represents a very large bill that will have to be paid — and the cost of paying it is going up.
http://www.globeandmail.com/servlet/story/RTGAM.20040619.wmath0619/BNStory/Business/?query=%22consumer%20debt%22