It is a truism that all debt is eventually paid.
Of course who pays the debt is the question. Either the borrower can pay, or, should the borrower default, of course the lender pays, and books a loss.
Currently the credit contraction is postulating the demise of the consumers purchasing power, thus the collapse of the economy.
Certainly with increasing unemployment, the purchasing power of the consumer will be impaired, of this there is little to no argument. However, looking past that argument, is consumer debt, going to add to and exacerbate this impairment?
Here we see that consumer debt is not at levels that could be construed as unsustainable, or at levels that should a contraction occur, result in a massive reduction in spending power.
Taking a look at Bank credit;
We see that Banks are definitely overextended and at historically high levels. This is in part why the current crisis has been so focused on the Financials.
When we take a closer look at Bank lending, the salutary fact that leaps out is the predominance of real estate lending on the Balance Sheets of the Banks, followed as far as the consumer is concerned by Credit card debt.
As a % of income, mortgage payments consume a far larger % of disposable income than does credit card servicing.
With borrowers defaulting on their mortgages, the lenders are paying the debt down, via writedowns, Fed subsidies etc. Thus we have the interesting phenomenon of actual debt contracting in the economy, reducing the service thereon, which ultimately should prove bullish to the economy.
This is not to say that there are no structual problems, as there will be, however, the pessimism that rightly prevailed prior to government intervention in the Financial sector has good reason to abate.
Once again the eleemosynary actions of the Fed look to prevail, and the philosophy of deus ex machina has paid off in spades for financial markets.
