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Debunking The Great Myth Of US Consumer Deleveraging, Or Why The US Economy Will End Not With A Whimper But A Bang
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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That's what armed revolutions are for.
BTW, if there was no federal reserve AND no fractional reserve banking AND money was 100% physical gold coins, then I would be on the side of the creditors, not debtors (within reason, anyway).
However, in the real world of the 20th and 21st century, the so-called "creditors" created those debts out of nothing, and required zero productive work on their part.
So, in the real world, even though there are massively numbers of irresponsible debtors out there, the debtors are far, far, far, vastly more "in the right" than the creditors.
End all lies.
End all fraud.
End all fictions.
End fiat money.
End debt money.
End all "authority".
End FederalReserve.
End FractionalReserveBanking.
End federal, state, local government.
The road to the "good life" for humans is... get real.
“Capital must protect itself in every way…Debts must be collected and loans and mortgages foreclosed as soon as possible. When through a process of law the common people have lost their homes, they will be more tractable and more easily governed by the strong arm of the law applied by the central power of leading financiers. People without homes will not quarrel with their leaders. This is well known among our principal men now engaged in forming an imperialism of capitalism to govern the world. By dividing the people we can get them to expend their energies in fighting over questions of no importance to us except as teachers of the common herd.”– Taken from the Civil Servants’ Year Book, “The Organizer” January 1934.
I live in Yellowknife Canada. I've noticed an unusual number of US plates. Washington, Oregon, North Dakota, Arizona, Alaska. They almost seem like refugees. In a local pub on Friday we were talking about the mid-20 early 30's people from Norway that showed up looking for work. Strangest thing! In the 30's they rode the rails, today we ride the wings. I wonder if people are buying their way onto cargo transports, stowaways?
Maybe these are people who are... dazzled by Ice Road Truckers and hope someday to achieve fame in that show. /sarcasm mixed with a bit of teasing.
I for one cannot withstand Yellowknife's climate (I have been up north in cold winters before until the doctor told me to get out of the cold and stay out) but consider that people will travel however far they would want to travel until they find a new home with a peaceful way of living suitable to them. Motivations may vary.
Credit card spirit vs Animal spirit
This makes perfect sense - in that humans are extreme "habit machines" and rarely change their habits voluntarily. It also matches my own observations.
But one massively important point is left entirely unsaid:
The government is behaving the exact same way! The predators-that-be in government are also humans, they are also massive "habit machines", and they are proving in spades that they will absolutely, positively NOT voluntarily change their spendaholic, debtaholic, fraudaholic ways.
And this, of course, is why all rational humans expect hyperinflation... when the predators-that-be have their credit cards cancelled, and must run the printing presses 24/7... then start adding zeros... then attempt price controls... then declare martial law... then hopefully get hung from every village square as honesty, ethics and justice require.
You mean DEFINITELY get hung. I wonder why it hasn't already happened........
"The American way of life is not negotiable..."
... until Americans run out of credit?
The Tower of Babel has returned – this time as a mountain of debt. Once everyone begins to speak the same language of credit without consequences we’ll see the same result all over again.
excellent ugmug +1
As I pointed out in other comments, the free market capitalist claim that this is simply a problem concerning government should be questioned. It turns out that what government and corporations are doing households are doing, too.
And yet personal savings HAS jumped, more than doubling from prior years. According to the NIPA accounts, personal savings totaled $4,884.5 Billion for the 8 quarters from 3Q08 through 2Q10, an average of $610.5 B/Qtr. That compares with $7,484.4 Billion during the 32 quarters from Q1'00 through Q407, an average of but $233.9 B/Qtr.
Some of that has to be paying down debt.
Yes we had massive savings.
Only until enough to wire to a bank and pay off a debt. Poof.
It did not take long before our bank realized they are just a direct deposit paycheck agent and they occasionally get a wire fee for transferring money out of thier bank into another to pay off a debt. The rest is cash.
We are expecting more inflow of cash into savings soon and within the year or so through careful saving and spending we will retire that last debt.
Let the Economist celebrate... everyone is boosting savings YAY!!! But only until enough is accumulted to eliminate debt.
Until they understand this minor point they will never see the true picture.
The real savings will be the no debt load and the cash flow to our household that is all profit minus normal and necessary expenses.
Credit is disappearing so I don't blame anyone from grabbing it while they can. I had a 15k limit card slashed to $750 limit for no reason other than I paid it off monthly instead of generated interest profit for the bank. My parents own a home worth over $1million in todays market with no mortgage. They went to every major bank to borrow money for business working capital and they could not borrow one penny. Not one. We will soon hit a recognition point. People have been in denial for quite awhile, slowly wiping out their home equity, and now IRA,401k etc... We are in for a wild ride.
Saving your money and letting your debt default makes perfect sense if you see the death of credit in the future. why worry about your credit rating when there wont be any credit? The banksters and govt have to pull out the stops to make you believe there will be credit in the future to have that power over you now.
Totally agree. This implies that more foreclosures and a hell of a lot more credit card defaults are coming. It is easy to predict when one realizes
why worry about your credit rating when there wont be any credit?
From the moment I/we stepped out of high school we were hammered with the need to have a GOOD Score to get ahead in life. I remember long ago I applied for my first cell phone and was recieved with derisive laughter and a demand for 1000 dollars up front as insurance against failure to maintain my contract. My score was that low at the time.
Now our scores are pretty good. We are tempted not to ever worry about score ever again but yet we hang onto it as England hangs on to the Crown Jewels because it only takes a phone call to make a problem that requires money to go away. We try to have cash instead now. And that is pretty tough if you have debt of any kind.
What is really crazy is that you must carry debt and show a history of payments to hae a good score and get anything. So what we do now is use the credit card, buy something minor... maybe a tank of gasoline. Make a bank transfer once it posts and pay it off. We will then learn how long the financial insitution will be willing to work for us for free because there is no interest being made by them.
If everything collapses and no one can get credit anywhere, then we must then face the possibility of a complete and total failure starting at the Market and working down to the regular banks and to the merchants who find that they cannot use the credit system since it is broken and faced with stores filled with product no one has money to buy.
Hopefully not the kind of product a desperate and hungry town will shoot and kill the shop keeper or banker for to get to get food to the kids.
Money makes the land go around. Cash is good, debt not so bad as long it is fixed and paid quickly. But anything else does not work.
Maybe I can too travel to the village on the edge of the world and trade a few cord of firewood for something useful and work my way to living without the encumberance of today's hype filled world intent on putting the population into a bad position where they have no peace.
Same here. I'm making sure that I use just one credit card, and I pay off the balance each month except for about one or two dollars. I leave that just in case the credit card companies start discontinuing cards with no balance on them. I want to be able to tap some credit source if an emergency payment goes beyond what I have put aside.
the basis of credit is trust yes? have we not all abdicated our responsibility to trust & be trusted to those who quantify our level of trust on the basis of something called a FICO?
have you ever thought about how silly that is? especially when those doing the quantifying have completely abdicated their fiduciary responsibility to guard our collective 'wealth'?
are you your FICO? maybe FIDO perhaps? bark little doggy and make sure you make your monthly payment by this date or we'll chip away a little more of your bone...
You are not your credit score.
You are not your fucking khakis.
Agree 100% - let the credit system DIE! It's a scam.......
Interesting that the MSM is finally getting around to what truthful blogs were reporting months ago.
http://theburningplatform.com/blog/2010/08/26/the-great-deleveraging-lie/
Ok Rocky... I read the PDF from the St. Louis Fed. Help me understand bc it looks to me like the report is at odds with Tyler's post. The way I read it, bank loans to consumers aren't necessarily increasing, but rather FASB rules 166 & 167 simply changed the reporting requirements: Whereas previously large commercial banks quickly dumped risky assets into the secondary securitization market (and thus got them off their books), 166 & 167 now require banks to report off-balance sheet SPV's.
Since large commercial banks took advantage of off-balance sheet SPV's, and smaller banks did not (at least to the same degree), the charts show a large increase in consumer loans starting around Jan. 2010, right when FAS 166 & 167 were codified.
Chart 2 shows that it was only large commercial banks that are showing the increase... Small, regional and community banks' portofolios either fell or held steady.
And what's the significance of Chart 3? That shows loan portfolios falling...
What am I missing?
It was not my intent to debunk the focus of this article by posting the Fed report. I'd like to be sure that readers have more than one source of information upon which to make decisions. I don't intend to parse Tyler's article, the WSJ article, or the Fed essay.
Here is my take-away: There is too much conflicting information out there (a lot of it due to the various interpretations of the same data) to make blanket statements about any aspect of the economy. Folks are spending themselves into oblivion? Sure, and I can come up with a page of Google search that will bolster that argument. The consumer is digging in and saving their asses off! Sure, same supporting information is available for that view as well.
Doing one's one due diligence is the KEY to maintaining perspective. I'd say you are missing nothing. You have a secure grasp of all the salient points; however, you will have to make up your own mind as to the conclusion(s). Sorry to have to report that.
Got my towels and shampoo. I suscbribed to this plan two years ago. It was "Dave" from Mumbai who eventually broke my back.
I think there are two types of people in the US right now; those who are levering up intentionally and those who still think they are going to get rich and be able to service their debt in some way.
People will figure it out as a basic survival mechanism. As for TPTB, welcome to the Zeitgeist bitches!!!! You fuckers thought you'd control it forever!!!
Eh?
They do control it. Who do you think is going to finance the rebuilding after people take their pitchforks and head back home? It's all a game for people. They think 'revolution' is like watching the ballgame, or something -- that you just take off the heads of a few fatcats and it's all said and done, that we'll have hundreds of years before people screw it up again, but it isn't so.
They'll finance any revolution just as they've financed the construction & deconstruction of America.
You over-estimate the capabilities of the proletariat. The people running the show know of the ideals and ambitions of the common man, and they know how to play to those desires--they do exploit them, and will continue to do so, regardless of any temporary revolution.
What you shouldn't under-estimate is man's capacity for greed. This won't be the last time we walk this path that greed has led us down.
You are correct in many ways. It has been written elsewhere that revolutions are led by figures of authority or previous fame in prosperous economies. (Not talking your guerrilla types and other sorts who involved themselves in skirmishes.) Look at the European nobility that engaged in our own Revolutionary War (e.g.: Lafayette). In lesser "civilized" areas the revolutions were crystallized and advanced by the former proletariat who saw which side their bread was buttered on.
what about the saving rate that turned positive some time ago? how does that tie in with this data?
Yep TD
nice post
If I'm not mistaken, in his first speech Mr. Obama labelled the American Way of Life as "unnegotiable". It seems the banks are proving him wrong after all...
He'll promise a chicken in every pot for as long as he has to until he brings the system down.
Why everyone presumes Obama is an idiot is beyond me--he's taking us in the direction he wants, as fast as he wants.
SWEEEET! I'm not alone in this. But I will say, I am maxing out the cards, don't give a fuck about the lender (shouldn't have lent to me in the first place) and I'd imagine my end game is just over the horizon. Oh well, It's been a blast. Nice tv, new computers, all I need to get my money back in the long run when I short this slutty market. BUT I don't care about credit. I don't want credit. From this point forward, it's cash or nothing. I won't pay double for a house just because I don't have the cash.
And for all you dbags who don't like my approach, F you, you're the ones with your hands on your little pee pee!
Kick ASS!!!!