Like a dinosaur, US economy heads to extinction because of excessive indebtedness

The most important lesson to be drawn from the history of debt is this: It's not the absolute size of your borrowings that matters. It's not even the relative size in relation to your income. The crux is whether the interest payments you have to make are more or less than you can afford to pay. And that, in turn, is a function of whether or not the rate can move, whether or not your income can change and whether or not inflation can help you or hurt you. On this basis, both subprime American mortgage-holders and a distinctly subprime administration may find the months ahead more painful than they anticipated.

The dinosaurs, we conjecture, succumbed to global climate change. The American beast - call it debtlodocus - faces a comparable economic challenge. The global economic climate seems to be changing. We hear no more talk of deflation; we hear a lot about rising rates.

For America 's giant, dinosaurlike economy - with its small, wealthy head; its big, fat middle; and its long low-income tail - there is a tried-and-tested response to a change in the weather. Dollar depreciation and inflation have saved the debtlodocus before. The assumption seems to be that they will do the trick again.

Yet this time may be different. For sinking like a velociraptor's fangs into the tail of the debtlodocus are interest-rate hikes that may outpace and check any increase in inflation. And no one knows when and how violently the leviathan may react to this slowly discernible pain.

It is too soon to speak of extinction, of course. But one obvious inference to be drawn from the British experience of an indebted empire and a sliding currency, as well as from the history of the diplodocus, is that eternal life is not on offer.

Source: The New York Times

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