"Mission Accomplished": Consumers are Re-Leveraging
Well, the Fed got it's wish. Americans were paying down debt and repairing their balance sheets. This is what needs to happen (and what still needs to happen). The massive debt boom of the 2000s has to be worked off before we have any kind of sustainable recovery.
But who needs a sustainable recovery when you can have a short term artifical recovery?
Bad policies => bad economic results. I agree with TPC below, for the near term (next couple of years) this is likely 'good news' for the economy and stock market (i.e. they will continue to rise), but long term this will create massive instabilities and (likely) another crash. 2008 was a response to the previous decades debt boom. And as catastrophic as 2008 was, only a fraction of the consumer debt that was run up in the prior 10 years was paid down or defaulted on. So instead of letting the consumer heal their balance sheets slowly (which would result in slow but entirely realistic economic growth) the Fed got it's wish and consumers are starting on a new debt binge cycle, because slow and realistic growth is simply not acceptable. ..... "Mission Accomplished", right?
MISSION ACCOMPLISHED: CONSUMERS ARE RE-LEVERAGING
7 March 2011 by Cullen Roche
Despite lopsided balance sheets and near record levels of household debt the Fed appears to have succeeded in convincing American households that it is wise to begin re-leveraging. The Fed’s latest consumer credit report showed broad improvement in consumer credit trends (via Econoday):
“Consumer credit outstanding in December rose $6.1 billion showing, for the first time in the recovery, gains for both revolving and non-revolving credit. Revolving credit, up $2.3 billion, rose for the first time in 27 months. Non-revolving credit, reflecting strength in vehicle sales, extended its run of strength with a gain of $3.8 billion. Looking ahead to January’s number, there may be some modest help from motor vehicle sales which edged up 0.6 percent for the month but the amount boosting consumer credit will depend in part on the share split of sales to consumers and to businesses.”
As I’ve previously mentioned, this is great news for the near-term economic outlook. A re-leveraging consumer means more spending, higher corporate revenues, etc. My hope was that a 10% deficit would result in consumers continuing to de-leverage, however, that looks like wishful thinking. Instead, the combination of easy money and no loser capitalism appears to be setting the foundation for another debt binge. At a level of 115% of debt:income this trend is clearly unsustainable, however, the American public appears intent on sustaining its fiscal imprudence. In short, enjoy the growth, however, once the deficit shrinks or another asset bubble pops the air is going to come out of the debt bubble once again and the upside down US consumer will again be exposed as the imprudent consumer that he/she is….