Ponzi Finance
Dec 28th, 2007 at 3:48 pm by Chris
The housing crisis has a lot to do with the deeply flawed, though highly encouraged, way American consumers handle their finances. Too many have mistaken debt for wealth and have acted accordingly. The result is grim.
The latest economic statistics show that consumers have depended on new debt for 83% of their cash flow during 2007. Though this is an improvement over the 86% of 2006, it still represents insufficient income-based cash flow to pay current principal payments on debt.
For 2007, we estimate that U.S. households will borrow about $240 billion just to pay scheduled principal payments on debt. For many of you, this is a Minsky Financial Instability theory situation known as “Ponzi finance.” It is more correctly described as “speculative finance”, but it may be appropriately described as “hedge finance.” [..]
Our Consumer Cash Flow model continues to track the consumer “liquidity drain.” In our last paper, our preferred measure was barely above 19 days. It is now at about 18.5 days and still declining. By comparison, households had about 50 days of liquidity in the 1990/1991 recession.
