Guest Post: The Great Deleveraging Lie
Submitted by Jim Quinn of The Burning Platform
The Great Deleveraging Lie
You can’t open a newspaper or watch a business news network without
seeing or hearing that consumers and businesses have been de-leveraging.
The storyline as portrayed by the mainstream media is that consumers
and corporations have seen the light and are paying off debts and living
within their means. Austerity has broken out across the land. Bloomberg
peddled this line of bull last week:
US Household Debt Shrank 1.5% in the Second Quarter
American households pared
their debts last quarter, closing credit card accounts and taking out
fewer mortgages as unemployment persisted near a 26-year high, a survey
by the Federal Reserve Bank of New York showed.Consumer
indebtedness totaled $11.7 trillion at the end of June, a decline of
1.5 percent from the previous three months and down 6.5 percent from its
peak in the third quarter of 2008, according to the New York Fed’s
first quarterly report on household debt and credit.The
report reinforces forecasts for a slowing economy in the second half of
2010 as consumers hold back on spending and rebuild savings.
One has to wonder whether the
mainstream media and the clueless pundits on CNBC actually believe the
crap they are peddling or whether this is a concerted effort to convince
the masses that they have done enough and should start spending.
Consumer spending as a percentage of GDP is still above 70%. This is
well above the 64% level that was consistent between 1950 and 1980.
Consumer spending was entirely propped up by an ever increasing level of
debt. The American economy will never recover until consumer spending
drops back to the 64% range that indicates a balanced economic system.
For the mathematically challenged on CNBC and in the White House, this
means that consumers need to reduce their spending by an additional $850
billion PER YEAR. Great news for the 1.5 million retailers in America.
Below is a chart that shows total
credit market debt as a % of GDP. This chart captures all of the debt
in the United States carried by households, corporations, and the
government. The data can be found here:
Total credit market debt peaked
at $52.9 trillion in the 1st quarter of 2009. It is currently at $52.1
trillion. The GREAT DE-LEVERAGING of the United States has chopped our
total debt by 1.5%. Move along. No more to see here. Time to go to the
mall. Can anyone in their right mind look at this chart and think this
financial crisis is over?
During the Great Depression of the 1930′s Total Credit Market Debt as
a % of GDP peaked at 260% of GDP. As of today, it stands at 360% of
GDP. The Federal Government is adding $4 billion per day to the National
Debt. GDP is stagnant and will likely not grow for the next year. The
storyline about corporate America being flush with cash is another lie.
Corporations have ADDED $482 billion of debt since 2007. Corporate
America has the largest amount of debt on their books in history at $7.2
Now we get to the Big Lie about frugal consumers paying off debts,
cutting up those credit cards, and eating Raman noodles 5 nights per
week. Household and non-profit debt, which includes mortgages, credit
card debt, auto loans, home equity loans, and student loans peaked at
$13.8 trillion in 2008. After two years of supposed deleveraging,
frugality and mass austerity, the balance is $13.5 trillion. Consumers
have buckled down and have paid off 2.2% of their debts, it seems. Not
exactly going cold turkey, but it is a start.
But wait. Consumer debt outstanding is $300 billion lower. If you
hadn’t noticed, the banks in the United States have been taking a few
losses on their loans over the last couple years. A simple search of the
Federal Reserve website reveals that banks have charged off 5.66% of
all their loans in the last two years. The charge off rate in the 2nd
quarter of 2010 was 6.66%. To verify for yourself go to the Federal
So, let’s get down to the nitty gritty. If consumer debt was $13.8
trillion at the end of 2008 and the banks have since written off 5.66%
of that debt, total write-offs were $800 billion. If total consumer debt
now sits at $13.5 trillion, then consumers have actually taken on $500
billion of additional debt since the end of 2008. The consumer hasn’t
cut back at all. They are still spending and borrowing. It is beyond my
comprehension that no one on CNBC or in the other mainstream media can
do simple math to figure out that the deleveraging story is just a Big
The truth is that the debt has simply been shifted from criminal Wall
Street Banks to the American taxpayer. These consumer debts were
created in a private transaction between individuals and these banks.
When the loans went bad, the consumer should have lost their home, car,
etc., and their credit rating should have been ruined, keeping them out
of the credit market for a number of years. If the banks that made these
bad loans made too many, they should have failed and had their assets
liquidated in bankruptcy. Instead, the Federal Government has inserted
the American taxpayer into the equation by using our tax dollars to prop
up insolvent Wall Street banks and allowing screw-ups who took on too
much debt to live in houses for over two years without making a mortgage
The Big Lie will eventually lose out to the grim truth. America’s
economy is built on a debt based foundation of sand and the tide of
reality is relentlessly eating away at that foundation of debt. Collapse
is just a matter of time. The charts below from the Federal Reserve
paint a grim picture of reality.
Total Debt Balance and its Composition
Total Balance by Delinquency Status
New Seriously Delinquent Balances by Loan Type