Ted Bauman Blog | Debt: The Invisible Threat to Your Wealth | Talkmarkets - Page 2
Editor, The Bauman Letter
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Ted Bauman joined Banyan Hill Publishing in 2013 and serves as the editor of The Bauman Letter, Plan B Club and Smart Money Alert, specializing in asset protection, privacy, international migration issues and low-risk investment strategies. He lives ... more

Debt: The Invisible Threat to Your Wealth

Date: Tuesday, October 31, 2017 10:34 AM EDT

The first thing that struck me when I read Taibbi’s article back in 2010 was that he wasn’ttalking about taxes. After all, that sort of hyperbolic language is usually reserved for the IRS.

But Taibbi was on to something: The great sucking sound we hear is working and middle-class wealth being vacuumed upward to the wealthiest U.S. households … via credit markets.

It’s a largely invisible process. That’s because, with the exception of health care, most people assume that the prices of things like housing, education and medical care reflect supply and demand. If life in the U.S. is expensive, it’s because it’s good and in high demand.

That’s dead wrong.

The availability of cheap credit in the U.S. artificially inflates the prices of housing and education. If people had to pay cash for those things, they’d be much cheaper. But they don’t; the U.S. has one of the most debt-based economies in the world.

Why is there so much debt in the U.S.? Because there’s so much lending. Why is there so much lending? Because there’s so much debt.

It’s a circle, and it works like this:

As income and wealth inequality in the U.S. has skyrocketed over the last 30-odd years (see chart below), the richest households have increasingly put their yield-seeking cash into consumer lending markets. That’s what happens when firms like Goldman Sachs sell bundles of “securitized” mortgage loans to wealthy investors, for example.

This great gusher of excess money looking for yield has found its way into every nook and cranny of U.S. consumer markets. With so much money out on loan, consumers can bid up the prices of goods with a relatively fixed supply, like houses or college degrees.

These debt-fueled higher prices translate into increasing flows of money, in the form of interest payments, from borrowers to lenders, and thence to the ultrarich investors who provide the wholesale capital.

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