30% per Year for Five Years
Imagine if you could get a return of 30% per year for 5 years. With compounding you'd have 271%. At this rate it wouldn't take long to secure a very nice retirement.
But it isn't investment return that has grown at 30% for 5 years. Americans have been spending 130% of income for the past 5 years. It means that on average households have an extra 1.5 times income of debt. This amount is staggering and that is the only way to describe it.
Consider affordable housing being 3x income, with 25% down that means that an affordable mortgage should not exceed 2.25 times household income. Essentially, on average, Americans have 2/3rd of a maximum mortgage of extra debt. Only about 2/3rds actually own a home.
At 8% debt servicing of the interest alone costs 12% of income.
Thirty percent is close to 1/3rd of income. It means that households need to reduce spending on average by 25% to live within their means.
This will not be easily fixed and it means that every industry is going to take a hit. I can't see how this doesn't take years upon years to fix. I suppose allowing the dollar to inflate to double reduces the debt burden to 6% of income if you can figure outh how to make sure wages go up proportionately. But, the interest rates would go up enormously in order to attract money.
Spending 130% of income when the economy is supposedly booming is a complete disaster. People should be saving when times are supposedly good.
I don't see how this doesn't result in years of hard times.
Good economist like Mish have been advising for the past few years how to prepare for the hards times that are coming as a result of this insane behaviour. The advice has been simple, do not borrow any more money, cut back on spending and reduce debt.
It is probably time to consider what the credit squeeze means to investments as people are forced to start living within their means.
I think everything gets hit. I guess cheaper substitution products do well, hot dogs for meat and that kind of thing.