Two pieces of economic data have been consistent throughout late 2007 and all of 2008. The credit market is in reverse and oil prices are in fifth gear. These two economic factors paint the true picture of the U.S. economy from the general public perspective. We discussed the oil price issues last week. This time, we’ll look at finances.

The credit market is probably the most telling example of the difficulties facing American households. The so-called economic growth years of 2004-206 were debt driven, spurred on by extremely low interest rates and reckless mortgage lending policies. The poor lending practices during the so called "housing boom" of the early 2000s are now catching up with those lenders. That housing boom was "created." It did not occur naturally. It was created by extremely low interest rates employed by the Federal Reserve Bank to lift the economy out of the post 9/11 recession. The interest rate, held at a very low level encouraged borrowing at unsustainable levels. It simply made too much economic sense not to borrow money when it was practically being given away. The result was rash of people and speculators buying properties they could not afford under normal interest rate conditions. This in turn drove up the value of these properties to fantastic levels. A home that was $150,000 was suddenly selling for 30-50% more simply because all this lending cash was available. Net worth’s skyrocketed because property values were going up monthly by huge amounts.

Of course, this process is unsustainable for long because these loans have to be paid off. Even with very low interest rates, simply paying on the equity of a home valued 50% higher than normal is going to place a strain on people whose salaries did not rise in turn. It is a proverbial house of cards. As soon as a few people find they cannot make those payments the logical option is foreclosure. The foreclosure option is made even more attractive because the loans consisted almost entirely of interest. Walking away from those loans actually made economic sense.

A telling example of the Bush economic policies can be seen by looking at the performance of the leading home improvement company. In late 2002 Home Depot’s stock was right around $27.00 a share. In May 2008 Home Depot’s stock is right around $27.00 a share. The $45.00 price in 2005 showed how all that borrowed money was getting spent. Because Home Depot is a company that lives off the state of the domestic market it is a good barometer for the “people’s economy.” Home Depot is in the same position today as it was 5 years ago but it now has 4 times more debt than it had 5 years ago.

The Bush Administration (and Fed) economic policies have never produced healthy growth. They’ve simply made it appear that way by covering up a huge wealth shift away from the population at large by giving them borrowed money to spend. Where did all that so called wealth go? In April 2008, for the first time since World War II home equity dipped below 50% of mortgage market. The nation’s homeowners owe more than they own.

As the easy money dries up, so does the prosperity of millions of Americans. The overall economy looks like it might keep its head above the water level but the evaporated lending market and skyrocketing oil prices are holding the population under water. When Bill Gates and I are in the same room the net worth of that room is in the billions. It is not until we look at the component pieces that we see that 50% of that room is actually under water.