Debunking The Great Myth Of US Consumer Deleveraging, Or Why The US Economy Will End Not With A Whimper But A Bang

Tyler Durden's picture

By now everyone 'knows' that the US consumer is hunkering down, paying down debt and performing other mythological tasks. Alas, as the WSJ points out today, this is not exactly true... In fact not true one bit. The reality is that over the past two years, US consumers have not been deleveraging as a voluntary act of eliminating debt, but have been actually aggressively leveraging more and more until the bank providing them credit puts them into involuntary bankruptcy, cutting off the money spigot. This is a startling realization, confirming that the average American is actually hyperleveraging to the point where all available credit is forcefully eliminated by a lender institution!

Here are the facts: as the Flow of Funds report demonstrates, total household credit, consisting of Home Mortgages and Consumer Credit, has indeed declined by $610 billion from $13.2 trillion to $12.6 trillion since the credit bubble peak in June 2008. Yet, as Mark Whitehose points out, there are two ways in which this "deleveraging" can occur. Voluntarily, in the form of actual financial discipline, whereby the end consumer makes a conscious effort to pay down their debt, and Involuntarily, which is really not deleveraging, but aggressive leveraging to the hilt, up until the point where banks eliminate all credit access to the end consumer.

Luckily there is a way to quantify which road has been more travelled by. As the WSJ points out, in the period in which consumer credit has declined by $610 billion, banks and other institutions have charged off $588 billion in mortgage and consumer loans. (Our attempts at recreating these numbers using Fed H.8 and charge off data were slightly off, in fact demonstrating that based on charge off data as calculated, forced deleveraging will only accelerate as it catches up to bank charge off runrates). Nonetheless, a good way to visualize this phenomenon can be seen in the chart below:

Putting numbers to the data confirms that of the over $600 billion in deleveraging, only $20 billion or so of it was voluntary, with the balance occurring due to continuously irresponsible borrowing practices, in which US consumers spend, spend, spend themselves into oblivion only to be cut off cold turkey, instead of entering a slow deleveraging rehabilitation which would allow them to shift into the transition to a new creditless normal far easier.

The last observation is key as it has rather startling implications to David Rosenberg's theme of the New Frugal Normal. It would appear consumers do not, in fact, moderate their spending while still in possession of credit (regardless of its cost) - quite the contrary: they accelerate spending until the charge off threshold at the lender is breached, and all credit is cut off, also resulting in a collapse in a creditor's FICO score, cutting him or her off completely from future (at least near term) credit access. Thus what is occurring at the end of a typical consumer credit lifespan, is not a whimper but a massive bang. What happens after may require Stephen Hawking's explanation rather than David Rosenberg. The conclusion is that consumers do not pass a moderate "go" on their way to insolvency, they go from hyperleverage straight into bankruptcy.

What this means for consumption as observed on the supply-side, i.e., sales at stores like Nordtstroms and Barneys, is that instead of trendlines being indicative of what is truly happening behind the scenes, we have now entered a phase where sales will spike only to drop off in a quantized, step-wise fashion, rather than a linear drop off. This would make all the sense in the world, when one considers that side by side with the observed "deleveraging" of consumers, sales at aspirational store concepts are in fact surging, as the broke middle class performs one last "swan song" rampage of purchasing every Gucci and Chanel bag available, before saying goodbye to credit for a long, long time.

And with unemployment still at record highs, and soon to take another leg higher, paychecks continuing to decline, excess capacity at record highs, 99 week EUC and Extended Claims reaching their ceiling 2 year anniversary from the Lehman collapse, and the general economy double dipping, the implications of this will be dire, as there will be no gradual decline. Instead, to borrow another cosmological term, instead of the US economy decelerating at a rate proportional to the removal of credit from the system, it will grow and grow until it hits supergiant status, only to collapse into a neutron star (or worse) singularity, in which only the Fed will be left beyond the event horizon, only to suffer a similar fate in its last ditch failed attempt to stimulate hyperinflation and rescue the US consumer and banking classes from the infinite gravitational pull of a failed Keynesian experiment.

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RockyRacoon's picture

Load up and check out.  Take the towels and the little shampoos as well.

I'm maintaining my 800+ credit rating so that when the ramparts start to fail I can borrow to the hilt (they will be seeking me out) and check out with a few precious metals purchases to supplement my income in my old age.  I'll have created my own little Poinzi scheme to remove my brick in the wall from the bigger Ponzi.

Freebird's picture

So the American peoples are following their debauched leaders in squandering their debauched currency and more...? Sounds like a plan.

RockyRacoon's picture

You goddam right.  They showed us how the game is played by giving us hands-on training as well as a plethora of tools.  This is gonna be fun.

See this link posted at another article:

Make special note of chart #3.

silvertrain's picture

 "They showed us how the game is played by giving us hands on training as well as a plethora of tools"

 Damn skippy they did..Everybody is not alseep, I can guarantee you that..Patience is the virtue and there will come a time to take advatage of the situation at hand...

 Be prepared, it wasnt raining when Noah built the Ark..In fact, it hadnt rained for years...'s picture

s i m p l i c i t y

     p a t i e n c e

          c o m p a s s i o n



New_Meat's picture

w a s  that a  h a i k u  ?

-- Ned

grunion's picture

Actually they are instructions on how to be a decent human being. Probably why they are not recognized...'s picture

t a o te c h i n g


-- kath

skippy's picture

I've got my towel, do you.


Skippy...BOING, BOING, BOING!!!.

RockyRacoon's picture

Yeah!  And thanks for all the fish.'s picture

power of the,   t  o  w  e  l .

i have great respect for my towels. very feng shui.

Getagrip's picture

In fact it had never rained. All water was sub terrain. That's why no one believed Noah and thought him a fool...      

Freebird's picture

Happy days Rocky. I am keen on Marc Faber`s analogy of how we each need to be our own central bank. Reserves in PMs, hard assets, fx to protect your fiat requirements and by the looks of it, the masses welch on certain liabilities...

FEDbuster's picture

walstreetpro2 was way ahead of you guys with the buying silver with credit cards that will never get paid back.  Enjoy this blast from the past (June 09):


tmosley's picture

Some were doing this in 08.  I thought about it myself.  Of course, now I wish I had.

adissidentishere's picture

Thanks for posting that link. Very interesting commentary and data.

Dburn's picture

Didn't anybody take cash advances on their cards to short bank stocks in 2008? What a terrific account payable call. "Sir, you are 90 days late on your credit card payment. " "Yeah, hey sorry about that and I also would like to thank you for the 6 figure line of credit that I'm currently making a bloody fortune off of shorting your stock. If you could wait about 15 days , I'll pay you when the calendar year passes. ok?" "You are using our cards to short our stock...I


rosiescenario's picture

...just a friendly reminder that you allocate a bit toward the purchase of ammo and a few of the tools that it is used in...good time to be brushing up on your skills at the local range....Front Line and Thunder Ranch offer some useful educational courses, especially if your liberal arts degree did not include was lacking at Harvard.

Saxxon's picture

Bet my FICO (820) is bigger than yours.  I plan to do the same thing if the Fed will let me.  Due to the current admin's bailout policies the responsible are being fucked into paying for the irresponsible; but that cannot last long.  Yes, I think they will come to us.

RockyRacoon's picture

Well, as my second wife once said, "It's not the size of the wand, it's the skill of the magician".  My skills at maneuvering thru the credit world and finessing the system are pretty good after all these years.  Betcha I can amass a larger fake fortune!

Miramanee's picture

I agree with what I read here today. The next bubble, the great inflation, QE2...whatever you want to call it...any access to credit in the future will not spur growth, it will precipitate a desperate on credit, a last grab mentality. Of the many fatal mistakes being made today by our political and economic leaders, perhaps the greatest is the belief that they can reverse the current bust mentality that is moving the herd toward desperate and dramatic measures. AND, with the middle class increasingly caught between the metaphorical rock and hard places of massive COST inflation while access to money and credit contracts (Deflation), ANY and all crexit that somehow trickles down to the middle class will be gobbled up and used NOT to reconstitute the consumer economy, but to prepare for the tidal wave of systemic dislocation that people now unconsciously feel is inevitable.

Miramanee's picture

Desperate RUN on credit

Lest we forget or ignore our sordid and sorry past, ALL credit expansions ends in busts. All of them. And the current credit bubble, the one that has been building since Tricky Dick defaulted on our gold obligations in 1971, is by far the largest and most systemically malignant expansion in the history of humanity.

What we will expeience in the years to come vis credit will be pretty frightening, as ANY access to new credit that makes it's way down to the tens of millions of middle class citizens will be treated like truck loads of food are treated by starving Ethiopians.

living on the edge's picture

Brilliant Rocky. I have a question however, did you get your idea from the Federal Reserve charter?

RockyRacoon's picture

Nah.  I'm just naturally sneaky.  I've paid attention to the machinations of the credit ramped economy and savored the possibilities.  You could say coon curiosity.

hangemhigh's picture


something like that here too.  critical path part of survival based exit strategy.  bang them fico scores higher then use them to finance carefully camoflagued escape routes............

Incubus's picture

I've been doing this as well; it's a game of chicken right now, and I think we'll bring them to their knees before they get to fleece any of us again.


Laura Ingalls's picture

I understand the temptation but I wouldn't do it. 

A person I believe had an inside track with God and who predicted the destruction of the World Trade Center, the economic problems we are having now, along with future hyperinflation also predicted that the coming times would be extra difficult for people who were in debt.

tomdub_1024's picture

seems I am playing this game as well, RR. Seems you have generated a bit of response, I wonder sometimes how many have figured out the "game" and are running with it...and that's all it is, in reality, a "game". I could blow it all, now, and be okay with the results. I have a happy, frugal, life. A few additional luxuries, though old and not valued, I have. They are good wife, children (non-public-schooled-training-for-Matrix-insertion, they are learning flexibilty in thought, critical thinking, useful skills for the next paradigm) are my base, growing good food, building new things, saving $$$ by DIY and thift stores (and no taxes).

If you are ever visiting the intermountain NorthWest, let me know, gotta homebrew waiting and we can stratergize (apologises to Bush the 2nd)....:)

bank guy in Brussels's picture

Fabulously on-target re the American mentality

One last rodeo, one last grab at the brass ring, one last day of luxury ... because they know it will never be there again.

The way Americans were coached by advertising all these years, this behaviour is no less another creation of New York's Wall Street and Madison Avenue.

midtowng's picture

It's a society without any morals or culture. No one cares about tomorrow or the next generation. It's all about me, Me, ME!

Monkey Craig's picture

Great point. With this culture, no wonder the US is going down the tubes!

mamba-mamba's picture

I can't speak for anyone else, but I have a kid. I care about the next generation. On the other hand, once it becomes clear that the system is rigged and everyone else is cheating, there is no incentive to play by the rules.

But the fault for this sad state of affairs lies with those who rigged the system, not with "regular" people who got fleeced.

Note that I am not suggesting that people should cheat each other. I am only commenting on the relationship of individuals to large banking organizations.

Just my $0.40. (2 cents, adjusted for inflation).


hangemhigh's picture


you're both right and wrong.  it is a society without morals or culture. but, the rot is clearly a  head down phenomena.

i'm more than willing to play the game the way it's supposed to be played, but when the insatiable trash at the top of the food chain reneges on the social contract and changes the rules to suit themselves, i have no choice but to pay attention and act accordingly.

as for, that's their game plan not mine. money, living large, expensive toys, binging on wretched excess....none of that has never meant anything to me.

finally, those in power who were truly in a position to provide for the future well being of  coming generations abdicated all responsibilty for the general welfare when they decided that their individual private interests trumped those of the public at large.

by doing so they set in motion the forces of destruction that now threaten us all............


breezer1's picture

gives a whole new meaning to ' shop til you drop '. the drop means ' to another scocial status '. among the destitute.

rosiescenario's picture

"shop til you drop"....excellent!!!! til your bankrupt....spend til your sunk...

...if I were the Chinese I would be very worried about what this might foretell for their factories producing all of our future land fill....

Dismal Scientist's picture

Event horizon, bitchez !

Great post, I somehow found it hard to believe that rational behaviour had been widely adopted...

kujo's picture

Rational behavior? To act rationally people need to know the story. Just keep telling the story, people will hear and respond. We need to go through a reset financially, it's going to be a bitch. We'll have to figure out how to respond, be prepared as much as possible. We're going to learn to be neighbors now.

The captcha must be for stoned people tonight. 

Dismal Scientist's picture

Starting to save rather than max out credit would be rational. Hence me not being surprised that this has NOT happened. Get it ? Can assure you I'm not stoned.

Babalooee's picture

It does seem like the PTB would rather close the gate to the rational path of caution and have us continue spending. Their "success" may not so much be a reaffirmation of the great American way, so much as the signal of an animal no longer caring because there's nothing left to lose.
And as far as being stoned, everyone knows since that first jr, high joint that regaining the high is a mugs game.

dogbreath's picture

the game will provoke an extreme irrational response which will give TPTB the justification for a police state and world government.

Bob's picture

Tyler, I'm missing the part of your analysis that documents the hyperleveraging by the "irresponsible." 

I don't see how to accurately reach that conclusion from the coarse aggregate data here--I know that many (I believe most) of the charge-off's are people whose lines of credit were cut off long ago.  It takes time for creditors to finally charge bad debt off, especially with, as we all know, the lengths the banks have gone to over this period to keep bad debts falsely valued on their books to maintain the illusion of solvency. 

My guess is that there have been additional confounding increases in credit/debt taken out by the credit-worthy as well as concurrent deleveraging by significant numbers of the same group.  

I just don't see how you can authoritatively reach the conclusion that you did based on the data presented.    

Not that Deadbeats Prosper! doesn't make for a wonderfully provocative headline. 

stev3e's picture

I agree, funny number interpretation going on here.

Tyler Durden's picture

Great point. What we failed to mention is that long before the credit contraction inflection point was reached, the charge offs were long-averaging about $50 billion per quarter. You are absolutely correct that the actual charge off number is a leading indicator to the credit collapse. Also, the fact that it just hit a fresh record in Q2 2010 is likely not good then. Furhtermore, as I am confident you will agree, all that matters is the marginal move, and as such a ratio of $590 billion to $20 billion of forced versus unforced credit contraction tells you all you need to know. (And yes, that $20 billion may consist of $1 quadrillion in new credit issuance... the problem is that it is offset by a $1,000,020,000,000,000 contraction on the other side). Lastly, please point out where in the post are deadbeats singled out? For all we know Lloyd Blankfein has maxed out his 10 Centurions to buy gold and have it shipped to Bora Bora.