"Is the U.S. building a debt bomb?" (American News, Nov. 1) explains the problems associated with the growth in internal and external debt. The bomb is already built. The question becomes: How strong is it?
Unfortunately, the increased debt in the consumer sector appears to be correlated to a growing trade deficit. Americans are using increased borrowing to pay for foreign goods, thereby exporting dollars. This poses a risk to the dollar, with the associated external dollar risk--the central bank raises interest rates to prop up a weak dollar, causing or exacerbating a recession.
Although there is a booming stock market and strong house market, there are many people with no stock portfolio or house with built-in appreciation. Therefore, even with appreciation in financial assets and residences, many people have no funds to sustain any financial downturn--including unemployment. When the unemployment rate goes up, the bankruptcy rate is sure to follow. Watch out for 2 million bankruptcies a year in the next recession.
As debt levels continue to rise, this breaking point is sure to be reached by more families. Rising unemployment will result in a quicker crisis. If total debt is close to disposable annual income, this means that at least 8% of disposable income is paying interest on debt, without paying down any principal.
Alan Greenspan must be careful in his rate hikes; a 50 basis-point rate increase in this environment can feel like a full-point hike. It is the Federal Reserve's job to take away the punch bowl, just as the party gets going.
Robert M. Singer