the economic woes of Greece and China bubbled to the
surface and tugged at the stock market in the last
couple of weeks, investors might have thought: Not
a more appropriate response would have been: Not still!
years after the U.S. financial crisis, people are weary
from financial wreckage in the world. Just when
individuals finally think they are past it, it seems to
show up in the news and threaten the U.S. economy and
retirement savings. Yet, the world’s infection from
massive debt is still a long way from healing.
hurt should have been predictable, University of Chicago
Booth School of Business finance professor Amir Sufi
told financial analysts from throughout the world last
week at a CFA Institute seminar in Chicago.
is still more wreckage to come globally, according to
Sufi, who examines the impact of the historic debt
overdose throughout his acclaimed book co-authored with
Atif Mian, "House of Debt: How They (and You)
Caused the Great Recession, and How We Can Prevent It
from Happening Again."
specifically, Sufi blames household debt, primarily the
debt took on prior to the U.S. housing crisis to buy
homes and provide spending money for other purchases. In
the six years following 2000, he said, household debt
jumped from $7 trillion to $14 trillion.
wasn’t just the U.S. that overdosed on debt.
did too. Sufi says that’s at the root of problems in
Greece and other European countries such as Spain, where
housing prices tripled around the same time as the U.S.
housing boom. In the aftermath of Spain’s housing
bust, 23 percent of people are unemployed and half of
potential young workers are without jobs.
don’t think we’ll see anything good coming from
Europe for years," said Sufi.
individuals take on tremendous debt, Sufi contends, a
crash is inevitable, stifling the economy for a long
time. The problem begins to show up when home prices
plunge, with selling prices unable to cover loans.
People cope by cutting spending dramatically, sending
the economy into a downward spiral, Sufi said.
don’t have customers they need, lay off workers and
cut back on business equipment and supplies. As more
lose jobs, individuals delay purchases. The falloff in
purchasing is shocking compared with the pre-bust
period, when debt made it possible to spend freely.
the U.S. economy has failed to grow at the expected rate
of 3 percent a year, some analysts have termed the
malaise "secular stagnation."
so, Sufi said: "This recession is exactly what we
should have expected it to be."
set off by household debt run the deepest and longest
because the pain is borne by the poorest members of
society, essential for spending money and driving the
economy. Even now, with the U.S. going through one of
the weakest recoveries after a recession, consumption
remains weak, he said.
the last few years, analysts have repeatedly estimated
that the economy would pop back strongly, but gains —
though continuous and probably sustainable — have been
far weaker than forecast. Sufi noted that analysts have
failed to understand the impact of household debt.
notes that car sales in California plunged by 50 percent
among households in the lowest 40 percent of earners
between 2006 and 2010. Births also fell off sharply
within that group.
Bianco, president of Bianco Research, said the U.S.
economy is worse now than in the third quarter of 2012,
when the Federal Reserve began a round of quantitative
easing stimulus to help the economy improve.
the economy isn’t in a recession, he said, "It’s
a C-minus economy." If it were a child with a
report card, "you’d sit him down and say he must
the U.S., Sufi expects the economy to gain strength as
incomes start to rise. Yet, the recovery would have come
quicker and stronger if the government had allowed
homeowners to wipe away overwhelming mortgage debt, he
said. That would have freed people to spend again,
providing the fuel the economy needed. In Europe, he
said, the problems will drag on unless countries are
allowed to restructure their debt.
such relief, Sufi said, necessary reforms won’t happen
because countries know gains will flow out to pay debts.
greatest risk to U.S. investors, however, may come from
China, the world’s second-largest economy.
increases in private debt burdens, followed by a sharp
crash in asset prices, portends terrible economic
growth," Sufi said.
Sufi doesn’t expect troubles in the Chinese or
European economy to put the U.S. into a recession, he is
worried about stock and bond markets. He says stocks are
overvalued now, and a sharp decline in the markets
overseas could cause "contagion" in the U.S.