Rick Santelli of CNBC had once posed a question that has become famous, “How many of you people want to pay for your neighbour’s mortgage that has an extra bathroom and can’t pay their bills”? It is said to have kicked off the Tea Party faction. This sentiment reverberates not only in America but in many parts of the globe with the tone varying. The underlying message is uniform – debt is bad and the debtors should pay for the sins they have committed; from henceforth the people must learn to cut their coat according to the cloth – live within their means.
This moralizing is causing the country to be caught in a quicksand of troubles from which there seems to be no climbing out.
The years preceding 2008 were characterized by a borrowing frenzy that was unsustainable. It was not merely the sub-prime loans that were to blame but that people far overreaching themselves kicked off the crisis. Not only in Florida and Nevada but speculation in real estate went wild in Spain, Latvia and Ireland. The game was played entirely with borrowed funds.
The world economy as a whole became neither wealthier nor poorer because of this fanatical borrowing. But the world became vulnerable. When the lenders suddenly woke up to the fact that they had indulged in excessive lending the debtors were compelled to suddenly put brakes on their spending. This tumbled the world into the worst recession since the 30s. Since then the recovery has been pale and fragile – not what had been expected.
A point to note is that for the global economy as a whole spending is always equal to income. If one sector, suppose those with too much debts, is compelled to make cuts in spending to lower its debts either of two things will take place. Either some other group has to spend more or the income of the world will decrease.
Those segments of the private sector not weighed down by high debts do not see why they should step up spending. The corporate sector is bursting with cash – and hence why should they expand when already so much is lying around idle? Consumers who had hitherto never taken loans can now do so at low interest rates. But this incentive is downplayed by fears about unemployment. Even those with jobs are afraid of losing it. None wants to fill up the debt hole even if they can.
Kevin Simpson is a consultant with experience in http://www.cheaphomeslistings.com/. With his knowledge in the real estate market, he provides information over the best investments in California cheap homes listings for future owners and sellers.
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