Debt Service or Food?

Merrill Lynch reported yesterday that American households spend more on debt service than food.

That startling statistic underlines the extent to which the credit problem is influencing household cash flows. Sacrifices will be needed to bring the ratio of interest payments-to-income down from 14% to the level it usually reaches at recession lows, about 10%.

That means the American consumer is going to have to find $400 billion in cuts to their household budget in the next nine months. Despite the bad news on unemployment yesterday which generally confirmed my contention that we have been in a recession since January, the stock market went up. This is because market makers figure all the bad news is already discounted into stock prices. But Merrill’s David Rosenberg, who called this correctly many months ago notes there is a problem with this theory which is based on the assumption that the recession will be a garden variety six month long affair.

But if this consumer led recession turns out to look more like the 1973-75 down cycle (which we think it will), the stock market is priced only 34% of the way and the Consumer Discretionary sector only 39% of the way.

Although Hillary Clinton cynically proposed a Poverty Czar on the day she revealed that she and Bill have been living in high cotton ever since they quit the White House, Obama is the one who has made the right New Federalist proposals on poverty centered on Community Development Block Grants that allow local decision makers to spend the money free of Federal mandates. If the downturn is long and brutal, this will be the important tool for revival.

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0 Responses to Debt Service or Food?

  1. Hugo says:

    But debt service is food. It’s food for the bears. Especially the Panda Bear.

    When are both teams going to see the commonweal—or at least their common interest—in e.g. envirotech and energy independence; social security reform; debt reduction; control of healthcare costs and workers comp; education restructuring; reform of veterans services? How could we get together on any of that stuff if we can’t even agree to stop feeding the Panda?

  2. Morgan Warstler says:

    Thats the exact choice the federal government is facing, because there is no balanced budget amendment.

    Time for Obama to cut the social programs to lower the debt.

  3. Hugo says:

    Gotta cut ’em severely enough to force restructuring, including devolution upon devolution. Not “reform”; restructuring.

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