Since October 2008, I have pondered reasons as to why the recession began. Over the past 3 years, I have read numerous articles and watched various news programs, each claiming to thoroughly explain the real reason for the recession. The housing market was often fingered as the blame; with its sub-prime mortgages and “no-doc”loans. However, I do not think it was the back-alley practices or suspicious activities of the real estate market that tanked our economy. I truly it believe it is our good old attitude in the USA of “My credit limit or score says I can afford it”. I only feel this way after reading an article provided by Investopedia’s Financial Edge on Twitter called “Why Today's 'Recession' Tops The Great Depression”. Based on the information in the article, our nation should have struggled more than our predecessors did during the 1930s. The article is laced with a lot of financial jargon. Here are the major comparison points of the article:
“1). The nation’s debt: During the onset of the Great Depression (June 1929), the national debt was $17 billion, which of only 16% of our gross national product (GNP can be viewed as the net worth of the US). Also, there were no significant interest payments. As a nation, we only incurred debt during wartime, and promptly paid our bills during peacetime. The current debt level is near $15 trillion, of which $434 billion represents interest payments. In 2010, our gross national product was almost $15 trillion. 4.5 billion of our debt is serviced by foreign nations, over half of this amount is owned by China and Japan.
2). The nation’s spending: Programs like Social Security and Medicare are tremendously underfunded. Another $62 trillion dollars, in addition to the outstanding $15 trillion in debt, is needed to properly fund these programs. This is calculated to be approximately $528,000 per household. These figures are expected to increase as baby boomers retire. During the Great Depression, these programs didn’t even exist.
3). The workforce: Unemployment was calculated differently during the Depression when compared to the current formula used today. But the overall gist is that unemployment levels higher if today’s numbers were recalculated. As of August 2011, unemployment was at 9.1%.
4). The real estate market: Average home prices dropped 31% during the Depression, compared to a 33% decrease in the beginning of 2011.
5). The economy: Due to the deficit of $15 trillion, caused by the government overspending funds, our gross domestic product was overstated (GDP is similar a person’s gross wages from their job). If the deficit was included in this calculation, the US has not experienced GDP growth since World War II.”
The author goes on to say that there were some historical and other economic events impacted our current financial state. I agree with him to a certain extent. It is true that the government’s effort to spend its way out of a deficit was not the best decision. By doing so, a false sense of hope and security was created. Please read the full article at: http://financialedge.investopedia.com/financial-edge/0911/Why-Todays-
My question is: Why did we buy into it, literally? Our own government is basically maxed out, the deficit equal the total output of all US based firms. And still, “overall consumer credit levels increased by 6% in July 2011”, according to the Federal Reserve.“In 2010, consumer debt amount to $2.4 trillion, or $7,800 for every US resident…These figures do not take into account mortgages. Typical, credit card debt accounts for one-third of all consumer debt, while installment loans (student, automobile, boat, etc.). comprise the other 67%. As of December 2010, the average homeowner spent 15.27% of their disposable income to pay creditors, while renters spent23.99%.”(http://www.money-zine.com/Financial-Planning/Debt-Consolidation/Consumer-Debt-Statistics/). In an economic letter posted by the Federal Reserve Bank of San Francisco, it states that “One of the striking features of the U.S. economic downturn that started in 2007 is that it was preceded by the largest increase in household debt in recent history (http://www.frbsf.org/publications/economics/letter/2011/el2011-02.html).”
I can find so much more information that proves that we, as nation, continued to buy everything we could get our hands on…with credit. It is true that the real estate market crash prompted the recession. However, we as consumers added fuel to the fire.
Now I am more motivated to become debt free because now I understand I am the only one responsible for my financial future.
"Putting My Money Where My Mouth Is" is a journal about real life experiences and concerns of Jéneen R. Perkins. The purpose of the blog is to exhibit the real life challenges and answer the tough questions posed by the concepts of business, entrepreneurship and money.