The household sector’s credit market debt is the 2nd heaviest borrower in the credit markets after the financial sector (which includes mortgage pools, ABS, GSEs, and other categories).
Mortgage pools are pools of mortgage securities issued by one of the GSEs, and have brought a lot of money into our housing market, thus pushing up prices. They’ve grown from 4% of GDP in 1980 to 29% of GDP in early 2002.
ABS issuers have seen the greatest explosion of debt. 12 years after their introduction, their debt is 4x greater than that of commercial banks. That category includes credit cards, auto loans, equipment leases, corporate loans, mortgages (esp. sub-prime home equity loans), and trade receivables.
Pension funds and retirement accounts, which hold a lot of the ABS debt, have taken on the risk of default by borrowers of this debt. Expect to see a lot of pension and retirement account mutual funds take big losses when this credit bubble implodes, further burdening corporations and governments, and reshaping retirements for millions of Americans.
If the US budget deficit or credit demand is reduced, where will the foreigners put their dollars? The foreigners need a sufficient amount of US debt issue to recycle their dollars.
