It is an article of faith that American consumers are way over leveraged, particularly when it comes to credit card debt. But, a pretty scary article in the Financial Times the other day makes it clear that this is a worldwide phenomena that is likely to prolong the economic crisis we are in. I have pointed numerous times that I believe this crisis is going to be very, very deep and long–in part, because the crisis that broke out last fall with the collapse of the financial system was really the culmination of a 30-year period in which workers worked their butts off, productivity soared yet wages were flat.
So, people everywhere turned to credit to survive:
In the US, the carnage is well under way. For nearly two years, banks ranging from giants such as Citigroup to small community lenders have been bleeding as the economic downturn caused “maxed out” consumers to fall behind on their repayments of credit cards, automotive loans, student loans and other once-plentiful forms of credit.
In recent months, what started as a debacle has turned into a nightmare. As unemployment continued to rise and house prices kept falling, the rate of defaults has surpassed historic norms, rendering many of the computer models used by US banks to predict losses useless. In this phase of the crisis, lenders are flying blind.
And…
“Proponents of a V-shaped [economic] recovery are underestimating how much rising unemployment and an unstable structure of indebtedness can lengthen and deepen this recession,” says Sandy Chen, banks analyst at Panmure Gordon in London.
As an aside, a "v-shaped" recovery is intuitive I suppose–it means a drop in economic activity followed by a mirror-image recovery to previous norms. But, there is a big problem with that scenario:
The real unknown, however, is to what extent a recession already on a par with the 1930s will be turned into something even worse by record levels of consumer debt. British consumers’ leverage – how much they owe as a proportion of income – has been rising fast for a decade and for the past nine months has been running at a record high of more than 170 per cent – far bigger than anywhere else in Europe.
In the US, the percentages have been rising too, and are hovering around the 140 per cent mark. In the last recession, of the early 1990s, UK leverage was barely more than 100 per cent and in the US it was less than 90 per cent. “The severity of this crisis has taken everyone by surprise,” says Mr Powell at RiskMetrics. “Delinquencies and charge-offs [the percentage of outstanding loans that is unlikely to be recouped] are deteriorating at a faster rate than anyone expected a year ago.” [emphasis added]
Meaning, Brits are really in deep trouble. This is a global crisis. And it will be ugly.
