The Myths Of The Recession

But rumors of the dollar's death have been greatly exaggerated. The U.S. economy has been in free fall for more than a year now, yet the dollar has defied gravity since mid-2008. It's climbed 25 percent against the euro and 41 percent against the pound since last year's lows. Gold has fallen back to about $900 an ounce, and investors are pouring money into U.S. Treasuries and, by extension, putting their faith in the dollar.

Why is the dollar still so healthy? Hal Sirkin, a senior partner at the Boston Consulting Group and coauthor of "Globality," says that the Federal Reserve "turned on the printing presses pretty heavily" in its early attempt to jolt the economy. That led to the dollar's dip in early 2008 and gloomy forecasts from currency prognosticators, who said the U.S. current-account deficit, government debt levels and bleak GDP forecasts presaged a dollar collapse. "They were right, potentially, on an absolute basis," Sirkin says. "But recognize what was going on simultaneously … the rest of the world was also entering a recession, and doing the same sort of thing. And since all currencies trade relative to each other, [the commentators] were wrong."

In other words, other major countries are doing just as poorly, or worse. The euro zone, in particular, is dangling from a frayed rope. Standard & Poor's has already downgraded the credit ratings of Spain, Greece and Portugal, and issued a warning to Ireland. Those actions, as well as the region's relatively low interest rates, will weigh heavily on the euro's value in 2009 and make America's own fiscal woes look less troublesome by comparison.

Myth: Credit Cards Are Killing Us
Within the credit crisis, credit-card debt is widely considered to be the source of "The Next Meltdown," as one BusinessWeek headline put it. Like subprime mortgages, credit-card debt is often securitized, meaning it's packaged, sliced and resold all around the world. It's also grown at a fervid pace, increasing by roughly 80 percent since 1999 in the U.S., according to the consultancy Innovest.

With all that in mind, credit cards look a lot like mortgages did at the end of 2007, when the frothy signs of a bubble became clear. But Bernhard Gräf, an economist at Deutsche Bank Research, asks: "What credit-card bubble?" The relative sizes of the two sectors attest to that skepticism; U.S. credit-card debt, at just under $1 trillion in aggregate, is less than one tenth the size of the mortgage market. The rise in home-equity financing, which allows homeowners to borrow against their houses, contributed to the explosive growth of that sector; credit cards, on the other hand, are mostly used for everyday purchases like groceries and gasoline.

Despite some superficial differences, then, the dangers of consumer debt are overblown. "Mortgages were a bubble that had to pop," says Gräf. "Credit-card debt has not even been excessive." While aggregate credit-card debt has grown phenomenally in the United States since 1999, as a percentage of income it's stayed nearly level, hovering at about 9 percent. Mortgage debt, on the other hand, had become an overwhelming burden for homeowners by 2008, when levels hit 100 percent of annual income, up from 65 percent in 2000.

And with home values plummeting, many homeowners are doing the logical thing when they return the keys to the bank on homes now worth less than their mortgage value. Credit-card borrowers won't face the same negative incentives, since credit-card debt isn't backed by an asset with swiftly declining value. And though default rates will certainly rise, the securitization trend will give credit-card companies a little breathing room. Securitization in the mortgage market became a devil in and of itself, because, through a bit of financial trickery, subprime debts were resold as AAA bonds. But only about a third of credit-card debt is securitized, says Gräf, and since it hasn't been excessive, securitization works largely as it's supposed to, spreading risk throughout the system.

Consumer debt certainly isn't a good investment these days; Innovest estimates that credit-card issuers ate $41 billion in losses last year, and will have to face up to nearly $100 billion in bad debt this year. But compared with the mortgage sector, which has already suffered $1 trillion in losses, credit cards aren't nearly as scary as houses.