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"Mission Accomplished": Consumers are Re-Leveraging

Recs

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March 07, 2011 – Comments (10)

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?

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MISSION ACCOMPLISHED: CONSUMERS ARE RE-LEVERAGING
7 March 2011 by Cullen Roche

http://pragcap.com/mission-accomplished-consumers-are-re-leveraging

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….

10 Comments – Post Your Own

#1) On March 07, 2011 at 5:03 PM, leohaas (37.60) wrote:

OK. Maybe you are right.

Or maybe this is just normal in a recovery: at some point the majority of people see that there is light at the end of the tunnel, and they start spending again. And since they do not quite have the money yet, they take out loans. What is so wrong or unusual about that? That is the way we have been living for a few generations now. Sorry, all I see is a normal recovery. Maybe policies weren't quite as bad as you think!

By the way, we are nowhere near done delevering.  Millions of homes will be foreclosed on in the next few years, offsetting the rise in consumer credit...

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#2) On March 07, 2011 at 5:20 PM, binve (< 20) wrote:

leohaas,

>>Or maybe this is just normal in a recovery: at some point the majority of people see that there is light at the end of the tunnel, and they start spending again. And since they do not quite have the money yet, they take out loans. What is so wrong or unusual about that? That is the way we have been living for a few generations now. Sorry, all I see is a normal recovery. Maybe policies weren't quite as bad as you think!

Prior to 2000 the private sector has $4 trillion in debt, it peaked out at $13 trillion in 2007 and it is still in the neighorhood of $10 trillion. So in talking about this level of debt and what is 'normal during a 'recovery'', we need to ask if the $10 trillion in debt is sustainable (which represents a 115% debt/income). If you are saying that this level is okay to grow, then you don't see a sustainability problem with this metric. Sorry, all I see is an unsustainable one.

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#3) On March 08, 2011 at 3:05 AM, whereaminow (61.23) wrote:

Leo, 

Have you ever heard of the logical fallacy known as Post hoc ergo propter hoc?

David in Qatar 

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#4) On March 08, 2011 at 1:50 PM, rfaramir (29.63) wrote:

Resuming spending is fine, if you're spending what you have. Borrowing to spend on productive investment is calculated risk for reward. Borrowing to spend on consumption is idiotic!

We are free to be idiots, but we better not cry to be bailed out. Also, we should End the Fed to stop the perverse impetus to spend cash now: inflation.

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#5) On March 09, 2011 at 3:44 AM, checklist34 (99.73) wrote:

  good post and we had to have someone call someone an idgit.  why?

 I agree with Binve, deleveraging mustoccur.  But... it will be adjusted for inflation, and for population, and so the$ level that was par 10 or 15 years ago will be FAR exceeded by the bottom this time around. 

but... mefears a sustainable recovery can't occur until not just the american consumer but ALL OF EUROPE, more or less, deleverages.  The beras will be proven right on a number of things...

your chart, though, binve, just shows less of a rate of delveraging.  below 0 is still deleveraging.  

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#6) On March 09, 2011 at 4:21 AM, binve (< 20) wrote:

checklist34,

Thanks man, and completely agreed. Debt to income is still around 115%. No chance that deleveraging is done. The average for the last 50 years is around 60%. Hell, I would be a little more encouraged if it got back down to 80%. But anything over 100% on the leeward side of the deleveraging cycle makes no sense and is unsustainable for the long term.

>>your chart, though, binve, just shows less of a rate of delveraging.  below 0 is still deleveraging.

You are correct and I am definitely not oblivious to that. The trend is what is distressing. The level of private debt is still so high that the year over year change could (and should) go down to -5% and sit there for about a decade. The fact that it turned up and is almost back to 0 is extremely disappointing..

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#7) On March 09, 2011 at 8:01 AM, mhy729 (34.04) wrote:

Great post!  I am very curious to see what that chart will look like for this year and the next.  That was the one thing about the chart that I found disturbing, that debt is pretty much increasing all the time, except for a brief period in the early 90s, and currently.  I wonder what the breakdown of that chart by household income level would be, because the differences could be interesting.

Yes, the culture of borrowing to spend on consumption has gone too far (and it is disappointing to see that that appears not to be changing).  I suppose I'm not an objective observer on this, as I am averse to debt, and especially despise high-interest debt (bankers refer to people like myself as "deadbeats" because I refuse to carry any interest-incurring balance on my credit cards, and I have on a few occasions taken advantage of 0% financing...yes I should be thankful to those that subsidize my ability to do this by being imprudent with their credit).  I imagine that many here are "deadbeats" too, certainly when it comes to high-interest credit card debt.  *blech*

The one thing about the chart is that it is difficult to visualize how the actual size of the debt is changing over time.  For instance, how long would that chartline need to stay at -5% for the debt load to come down 25% from its high.  There's also the issue of the real vs nominal value on that debt, as noted by checklist.  Another thing that would be interesting to see is the debt broken down into groupings by interest rate.

Hah...MISSION ACCOMPLISHED...another instant classic among memes that will never die.

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#8) On March 10, 2011 at 11:04 AM, ETFsRule (99.94) wrote:

"The trend is what is distressing. The level of private debt is still so high that the year over year change could (and should) go down to -5% and sit there for about a decade. The fact that it turned up and is almost back to 0 is extremely disappointing.."

I couldn't find a debt-to-income graph, but I found the next best thing:

http://research.stlouisfed.org/fred2/series/TDSP

I think we're headed in the right direction. Credit is still decreasing, while income is increasing by almost 5% per year:

http://research.stlouisfed.org/fred2/graph/?chart_type=line&s[1][id]=PI&s[1][range]=10yrs

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#9) On March 10, 2011 at 12:32 PM, rfaramir (29.63) wrote:

checklist34,

"good post and we had to have someone call someone an idgit.  why?"

I think that was me... "Borrowing to spend on consumption is idiotic!"

Because it is! I'm preaching to myself, here, actually. Still paying off debts incurred long ago. But at least I'm paying them off, not accumulating them.

"To spend on consumption" is what we do as consumers. It's natural. It's why we produce: in order to consume. But when we *borrow* in order to consume and hope/pray/assume we can pay it back later, we are being idiots. During a boom, we get more idiotic. Instead of paying down debts, we get more hopeful and accrue more.

The Fed has the same problem. According to discredited Keynesian theory, the Fed should contract total credit during the boom so it has extra to expand with during busts. That's in theory. This does NOT happen in practice. Probably something to do with either our morally fallen nature or the fact that the Fed and its inflation of the money supply is the cause of the booms in the first place.

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#10) On March 10, 2011 at 12:44 PM, leohaas (37.60) wrote:

Sorry for the delay in responding. For some reason, the fool refused to post my comment. Not sure why...

What is normal in a recovery is an increase in leverage (even if you prefer to cal it a "recovery" or think it is only short term). That is what I was talking about. And since your original blog talks about consumer credit, that is what I was referring to in Comment #1.

However, in your Comment #2, you suddenly switch to private sector debt. That is something entirely different. About $10T of that is mortgages. With several (maybe ten) million foreclosures still to go over the next couple of years, wouldn't the private sector debt be going down, even if consumer credit is slowly going up? In other words: delevering is continuing.

David: not quite sure why you came up with that reference, but I assume it is because I said: "Maybe policies weren't quite as bad as you think!" which implies that the policies may have led to the recovery. We will never know because there isn't a parallel universe in which policies you consider more prudent were implemented, so we have something to compare. Notice that I am very careful here: I used "maybe" several times. I am a lot less sure the policies have worked than you are that they have not.

rfaramir: if all you do is call names, please stop posting on CAPS.

ETFsRule: thanks for posting your links. Looks like we are in the same camp on this issue.

PS Not sure where you got your numbers from. I got mine here.

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