The crushing truth about US household debt

I always feel guilty posting stuff about the US economy. This blog is supposedly devoted to our own bubble-related difficulties here in the UK. However, events on the other side the Atlantic are too frightening to ignore. I reckon it is where we are heading, so we should pay attention.

Here are two charts that illustrate how debt has squeezed US households. The first chart illustrates total household financial obligations as a percent of disposible income. In other words, it measures how much households are paying in interest and principal as a percent of their post tax income. The answer is about 20 percent - one dollar in five heads over to the bank.

As you would imagine, the bulk of payments go in interest charges. This is a huge transfer of wealth from the indebted masses to a tiny number of bloated overpaid bankers. This is what accounts for growing income inequality in the US.

You will notice that both charts tick down slightly in 2008. That is Bernanke's panic attack, when he reduced rates to just 2 percent. Notice how little the impact was on the household debt servicing burden. So when you hear people talking about rate cuts, remember the US example. Rate cuts don't help. Either banks don't pass on the reductions or people use the lower rates to build up ever higher debt levels.