For a long time now we have known that American citizens have been living beyond their means, living on debt.
The signs of shrinking household wealth are easy to see. People have been using credit cards and home equity to buy toys and pay their bills. Our savings rate has been zero for a while and household debt has been rising while home equity has been falling. People that dont like to hear we aren't savers anymore (unlike Japan) always point out the value of our investments - homes and stocks. Not sure what their argument will be after this month.
The changes are even more apparent when you look at the WW2 generation's cash society and compare it with our current "ownership" society. A majority of people lease cars instead of buying them. Recent home mortgages have gone from 15 year to 30 year to 40 year and we have had interest-only loans. Ownership has become a euphemism as people dont "own" things anymore so much as they rent items in their possession.
Again, none of that is a surprise. The data has been public for some time.
What did catch me by surprise was finding out that businesses are in the same boat.
While the media and the experts focused on the "housing crisis", the stories about the corporate paper market were both sudden and surprising. Like finding out someone has been living in your basement keeping the water running and the heat working. All of a sudden corporate paper not housing was the real crisis. We are told that if corporate credit dries up, companies wont be able to make payroll. Wow.
I didn't know much about the corporate paper market before this meltdown and I find myself wondering how long it has existed and when it became the "lifeblood of our economy".
I can understand selling bonds to fund an expansion but I don't understand borrowing money to make this month's payroll. To me that indicates an irresponsible level of cash reserves. It also suggests that there are a lot of companies out there that are barely alive and will not survive without easy credit. Both bad things.
Now Paulson has his bailout bill but the cycle of fear as spread around the world and things have gotten worse not better. The billion dollar question is whether this will be a short but acute problem or whether we are seeing the collapse of a system and the creation of a new one.
Will there simply be less credit next year than there was last year? Will banks shrink the number of home loans? Will car leases disappear? Will credit card limits drop? Will company revenues (and jobs) drop as people have less to spend?
How will people and businesses adjust to a world with less credit? And will it last?
