America's Biggest Economic Problem?

[Crewleader]

Most of Us are Broke ... Literally

America's Biggest Economic Problem?

By MARSHALL AUERBACK

My bills are all due and the baby needs shoes and I'm busted
Cotton is down to a quarter a pound, but I'm busted
I got a cow that went dry and a hen that won't lay
A big stack of bills that gets bigger each day
The county's gonna haul my belongings away cause I'm busted.

--Ray Charles

Almost half of U.S. homeowners with a mortgage are likely to owe more than their properties are worth before the housing recession ends, Deutsche Bank AG estimates. The percentage of “underwater” loans may rise to 48 percent, or 25 million homes, as prices drop through the first quarter of 2011, Karen Weaver and Ying Shen, analysts in New York at Deutsche Bank, wrote in a report published August 6.

In December 2006, only a few months after the peak of the housing bull market, the total value of U.S. residential property stood at $21.9 trillion. Prices have dropped by 31 percent since the end of 2006, so the estimated value today is about $15 trillion; however, the mortgage debt remains more or less unchanged and stands at $10.6 trillion. In other words, whereas debt-to-equity in the U.S. housing market was 48 per cent as recently as in December 2006, it is now 70 per cent and will rise to 80 per cent once house prices have mean-reverted.

Although painful, a rise in debt-to-equity of that magnitude would actually be manageable if it were not for the fact that income and wealth in the US is extremely skewed. The top 1 per cent of income earners in the U.S. account for more than 20 per cent of national income while the median household has seen no improvement in income for the past ten years. Within the median household sector itself, then, there is still a tremendous financial vulnerability which has not been addressed at all by the Obama administration. Home ownership in the U.S. is far greater than in most modern economies. Equity ownership is also high. The bursting of the real estate and equity bubbles has destroyed the wealth of the U.S. middle class to a devastating degree. And it is with this middle class that the high private indebtedness lies. If there is going to be a further financial crisis in the U.S. it is probably going to be focused on the household sector. If balance sheet recession dynamics are going to depress aggregate demand through wealth destruction and debt repayment, it is probably household sector demand where this will surface.

Almost one-third of all U.S. http://www.counterpunch.org/auerback08112009.html

[truedelphi]

1. And people with money in retirement funds found that those have gone

Downhill also. Many people have lost 30 to 40% of what they held.

[DemReadingDU]

2. and even broker after the next downward leg in the markets

:(