The Other Debt Default Story

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Yes – Some things really do keep me up at night and private debt is surely one of them. Here’s why:

With so much endless jibber jabber about public debt these days, it’s important not to lose track of another truly frightening (and growing) crisis that’s likely to get a lot worse without an extremely hard-to-achieve mixture of changes in: (1) personal economic behavior; and (2) economic growth rates that would have to significantly exceed current forecasts. Neither seems likely.

As the Washington Post reported yesterday, “A majority of Americans with 401(k)-type savings accounts are accumulating debt faster than they are setting aside money for retirement, further undermining the nation’s troubled system for old-age saving . . .” Keep in mind: That’s Americans WITH 401(k)s! We’re not even talking about the enormous numbers of poor, unemployed and struggling middle class Americans who not only have vastly accumulating credit card debt, school loan debt, automobile debt and mortgage debt but possess virtually NO savings cushion whatsoever.

So briefly, some of the implications:

(1) If and when interest rates do rise, the economic impact may well be far more significant than many economists have accounted for when using traditional models. The 2008 mortgage crisis was awful. This could be a whole lot worse – especially because large scale consumer credit defaults would risk ripping apart retail sales, destroying household income, further increasing unemployment and almost certainly stopping recovery in its tracks.

(2) As the Post points out: “Most of the people with accounts who are accumulating debt faster than retirement savings are older than 40, college educated and earning more than $50,000 a year.” These folks are generally not the population that has been on the proverbial radar screen – a major lapse in foresight. The consequences, both for planned retirements and for our social safety networks (particularly Medicare and Social Security), could obviously be seriously painful.

(3) If we do enter a rapidly climbing interest rate environment, the reality is that paying down long-term deficits becomes stunningly difficult. With more government money being poured into debt payments, that means even less left over for crucially needed investments in infrastructure, education and countless other programs. And that’s not even taking government gridlock into account . . . Kids born today are already looking at a “troubling” future (to say the least). We may soon need a new adjective.

Sadly, I don’t have a solution on this one so I’m sure as hell hoping there are some serious economic geniuses out there sacrificing A LOT of sleep. This story hasn’t gotten nearly the coverage it deserves. If things get bad, however, it may well be the only story there is.

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