Guest Post: The Great Deleveraging Lie

Tyler Durden's picture

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.
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.
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. G
reat 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
Reserve website:

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

Comment viewing options

Select your preferred way to display the comments and click "Save settings" to activate your changes.
Sudden Debt's picture

at least the colour pallets of the graphs look nice :)

economessed's picture

I suppose this means we can't revive the economy by updating our Facebook pages either...

Perhaps liquor and ammunition consumption is keeping us above 70% for the time being.

Pat Hand's picture

I'm not expending my ammo.  And there are a lot of excellent bottles of wine at the $10 range.  I do spend more on gasoline than I used to, but both bikes are in good shape if needed...

doggings's picture

I suppose this means we can't revive the economy by updating our Facebook pages either...

well something has supposedly made it worth 34 billion lol.  P-O-P !  


Mako's picture

Well, finally an article that isn't completely stupid. (Cheers all around)

There is no deleveraging in the system, deleveraging SYSTEM WIDE is called a collapse.  The only way the system doesn't collapse is getting more lemmings in, leveraging up, not down. 

Following a collapse you have to liquidate. 

Total credit market debt is $52.2T down from $52.9T, it's not deleveraging... it's collapsing.  The system ran out of idiot brick lemmings to put in the system at a great enough rate. 

What you are in is the beginning phase of the collapse, eventually the collapse will pick up, then after that the liquidation of all the non-performing lemmings.

SheepDog-One's picture

I concur. Even a depression assumes some kind of functioning economy underneath it...what we have here is a 75% Borrow and Consume FAILED economic model, and no amount of 24/7 fiat currency printing will ever float it! Beginning of the collapse, and this one will be the biggest the world as ever seen by factor.

Mako's picture

Nice post.

The system is working as designed... expand, peak, fail to expand, collapse, eventually liquidate.

Most of the underlying real economy is going to be wiped out when the credit system collapse.

Printing does nothing once the real credit system peaks.  It's like beating a dead horse, doesn't matter how much you beat it... it ain't going to run faster.  Lemmings are only now realizing they are the printing press and the printing press is being destroyed.

The deleveraging lie is just like the decoupling lie... all fiction.  Buzz words that work until the global credit system peaks.  Once the global credit system peaked those words mean absolutely nothing.

IBelieveInMagic's picture

Mako, can't the system be resurrected with pointed debt jubilee.

Also, I am hard pressed to think the Feds will not have Plan B on shelf. We may like to think of them as fools based on what they state publicly but that is not necessarily what they believe or know. The Feds are trying to keep the game going and will switch to Plan B when certain red flags kick in...

Am I being naive?


Mako's picture

They can have any plan they want... it will fail unless they have unlimited power. 

Once you realize the system is based on the false assumption of "unlimited", you then know it will collapse.   If you could supply "unlimited", I would think that would make you God or God-like.  

So, you either believe there is a Wizard of Oz or you don't.  Pretending like there is a Wizard of Oz has a relative short life span... I would say 55-80 years.

The government and the central banks can effect the rate, matter of fact that is the job of the CB... to continue the lie as long as possible. 

"The Architect - The matrix is older than you know. I prefer counting from the emergence of one integral anomaly to the emergence of the next, in which case this is the sixth version."

There is nothing going on today that hasn't already occurred in the past. 

"Am I being naive?"

No, don't think of it like that.  You were born into this so it is all you know, you will only experience one system collapse in your lifetime so how would you know?

Once you realize you need "unlimited" power to keep the lie going, you know that the Truth always wins.


IBelieveInMagic's picture

What is different this time (yeah, I know!) is that the USD is the reserve currency and unless our trading partners stop accepting or global trade ceases to be based on USD, it appears to me that the Feds have more cushion to try to keep things rolling. The Power-that-be are flooding the system with new monies (pretty much handing out money to their preferred groups) and letting the financial elites to pretend to "earn" large sums, no doubt, with the expectation that trickle down economics and asset price support will kick in at some point. We appear to have more time to allow these changes to be made to the system because of ownership of reserve currency status.

I am thinking that if the Feds/Treasury can get away with surreptitious debt jubilee (without inducing others who are current from defaulting), they may be able to keep this going much longer...

MachoMan's picture

I agree that we can keep our head above water for quite some time...  The end will be the same though.

The bigger issue and my problem with the "collapse" issue is that all we need to do is liquidate assets enough for the equation to be in the black again.  We do not have to liquidate ALL assets.  Obviously this will feel like total collapse and cause complete panic, but at the end of the day, there will likely be some underlying assets capable of performing...

Mako's picture


As time goes on they need more and more power to sustain the lie.  They were able to slow the decline in 2008/2009, the same trick will require much more once the 2010 is up. 

You can certainly have slow death periods, but it will collapse and it will have to be liquidated.  There is nothing that can be done other than to effect the rate some... as time goes on it will be less and less effective.

It has never been a question of if, it has only been a question of exactly when.   The clock is ticking.

Fox Moulder's picture

In 1998 LTCM was about to collapse the global financial system. It took less than $10 billion to bail them out. Ten years later it took trillions to "avoid" a collapse, and it's not over yet.

Pat Hand's picture

It's politically infeasible - the losers in such an event have more power than do the potential winners.


Calif could be brought back to solvency for about $500 per resident.  Of course, that's just the balance sheet...

midtowng's picture

It's possible to deleverage system wide without collapsing it. The trick is that you have to have an asset based currency, not a debt based one.

Unfortunately, we are in the latter catagory.

trav7777's picture

change the system.
Billions don't have to die to sate apocalyptic misanthropes such as you

pseanthebull's picture

Grim, grim indeed.

Archimedes's picture

Great article!  Hard to argue facts with graphs even CNBS morons can understand. No one knows exactly when it ends but I think this fall when job creation goes negative and 3rd QTR GDP prints negative on October 29th, three days before elections it will be obvious we are doomed. By spring of 2011 America will look much different.

sheep92's picture

Here is an interesting thought experiment.  Suppose that US nominal GDP remained unchanged, so that corporate top-line revenue gain was zero.  (This will get us a recession with real GDP contracting at whatever the measured inflation rate is 1% or so).  With corporate debt outstanding at 7 trillion dollars, each 100 basis point change in the debt yields 70 billion dollars of pre-tax earnings to corporate america.  In the last 4 months spreads have remained ballpark the same while treasuries have come in about 150 basis points from the top  or about 100 billion dollars a year.  Or about 7% pretax earnings 'growth' (total corporate profit are around 1.5 trillion per year) in an economy where the bearish case comes to pass and we have a double dip recession.

Hephasteus's picture

Luckily I've been saved by the anti-drug anti-sense campaign.

Jason T's picture

Jim Quinn has been charging away with great objectivity.  This is a great post!

william the bastard's picture

Interviewed on Fox News by Greta Van Sustern this evening, Rep. Debbie Wasserman-Schultz (D) told viewers that the Great Recession is over

Hephasteus's picture

Ya that's what rogain said about my bald roomate in college too.

sgt_doom's picture


Isn't she the wife of that Monsanto lobbyist and didn't she sponsor that "Food Modernization Act" that seeks to kill the small business farmer and the modern foods movement?

Just asking....

New_Meat's picture

Doom,she ain't no Cracka' for sure. 

"A native of New York and graduate of the University of Florida, she worked as an aide to then-state legislator Peter Deutsch."

Solid proof that "friends don't let friends go to UF" ;-)

Hubby, here:

International Global Metals.  Covers a lot of ground, Au, Pb, Fe.

- Ned

(On Topic-nmewn, you around, remember when I said I'd try, well, I'm with your original assessment here.)

Oswald Spengler's picture

But forcing debtors and creditors to bear the consequences of their borrowing and lending would impose forced responsibility and that is so last century. We want the sugar high and have no intention of suffering the after effects. Can you imagine the riots that would ensue if welfare recipients were required to act responsibly?

A_MacLaren's picture

Can you imagine the market meltdown if the Financial Economy were relegated to the appropriate status of the support function for the Real Economy?

Pimp Juice's picture

Debt schmedt. This beotch may keep going for another 10 years. Just keep buying gold and once it does all come tumbling down, we'll be fine.

Henry Chinaski's picture

The consumer hasn’t cut back at all. They are still spending and borrowing.

I would disagree.  The consumer has cut back all the way on spending because he doesn't have a job, or is doing twice the work for half the pay.  He is still borrowing to hang on to his former lifestyle until the recovery kicks in.   

Meanwhile back in Washington, Uncle Sam keeps piling it on.

$1,300,000,000,000 annual budget deficit / 310,000,000 citizens = $4,194 of additional debt per person.  Let's see, if there are five people in my family equates to $20,970 of new debt in a year (and not much to show for it).

When deleveraging finally kicks in, it's gonna be ugly.

DarkAgeAhead's picture

I would have had much more fun and done much better things had our favorite Uncle just given me the $20,000 to spend directly!  Instead some douchebag politician just padded an account somewhere.

New_Meat's picture

Dark, is it always only about you? ;-) - Ned

knukles's picture

Whaddya mean CNBS mathematically challenged?

A cup + B cup = DD cup

Go braid yer armpits.

mudduck's picture

'Criminal bankers'? On Wall Street? I thought they changed the laws for themselves to take care of that.

Amsterdammer's picture

An interesting paper looking back at what took

place during the Great Recession,'The myth of the "Phoenix miracle"


Miss Expectations's picture

Bravo, Jim.

Truth tellers rule! 

Ckierst1's picture

"The truth is that the debt has simply been shifted from criminal Wall Street Banks to the American taxpayer."


Not to worry.  Everything will be fine.  We owe it to ourselves - and our selves will get it in the proposed Guaranteed Retirement Accounts (GRAs) as the shapeshifted only permissable asset to be held - and get it good and hard!

ptoemmes's picture

I think it is now two "top posts" today where "consumer spending is 70% of GDP" has been mentioned. 

Technically what is 70% of GDP is Personal Consumption Expenditures (PCE) as defined by the BEA (I think). 

I seem to recall this being discussed on ZH recently or maybe it was at Mish's site or Karl Denninger's site but a search revealed nothing here so I reference this:

Assume what the referenced author claims is true - that consumer expenditures - actual flow out of our pockets - is closer to 40% of GDP.

So what you might say, and to tell you the truth my head starts to hurt as bad as being presented with a complicated Captcha challenge - I dunno.

It might make the lack of consumer deleveraging even look worse than presented in the top post.  But it might also help explain - if consumers like myself are paying off debt, reigning in discretionary expenditures, all in all shutting down more - why the impact on GDP is not more than it seems it ought to be.

OK - the GDP calc is rigged just as the PCE is rigged, but I'd like see analysis like this at least - also - be made in light of a more realistic consumer expenditure model.  But I suppose we'd have to agree on what that is.


Millennial's picture

Sung to the "Club Can't even handle me right now" by Flo-Rida

(1st Chorus)

You know I know how
To make em stop and stare as I zone out
The FED can't even handle me right now
Watchin you I'm watchin you we go all out
The FED can't even handle me right now (yeahhhhh)
The FED can't even handle me right now (yeahhhhh)

(end Chorus)

I own the FED and I don't need no help
Gotta be the feeling that Goldman player
Q-easin go wild, can't handle this plan
Life at the FED, arrogant like yeah!
Top like money, all the Houses just melt
One too many all know me like Timothy
Look like cash, and they all just stare
Bottles, Models, standin on chairs
Fall out coz that's the business
All out it's so ridiclous
Zone out so much attention
Scream out I'm in the Congress (Hey!)
They watchin I know this
I'm Easing, I'm Printing
I'm Inflating, I know it
You know it

(1st Chorus)

Still feelin myself I'm like I'm in control 
Can't stop now, green shots lets go! 
Three more quarters can I get a Kato 
Mises trying to make me pose 
Came to inflate till I deflate no more 
Celebrate cuz that's all I know 
Tip the Zombies buying the T-Bills 
Grand finale like Katrina superbowl 
Go, hard! I run the show 
That's right wild I've got money to blow 
Zero rates, more CPI when I walk in the door 
No hype do it big all over the globe 

(2nd chorus)

You know I know how 
To make em stop and stare as I zone out 
The FED can't even handle me right now 
Watchin you watchin me I go all out 
The FED can't even handle me right now 
Putch'yo hands up! (Yeah, yeeaaaaah) 
Putch'yo hands up! (Yeah, yeeaaaaah) 
Putch'yo hands up! (Yeah, yeeaaaaah) 
The FED can't even handle me right now 
Putch'yo hands up! (Yeah, yeeaaaaah) 
Putch'yo hands up! (Yeah, yeeaaaaah) 
Putch'yo hands up! (Yeah, yeeaaaaah)

(End 2nd chorus)

Dow got me watchin now (hey!) 
Got my attention now (hey!) 
Got everybody in the market wanting to know now 
I am Obama's man 
Come and be my Cramer friend 
We can both, zone, out! 
Bring ya t-bills here let me switch up your bond yields
I'll take you outta the FED and up in my new limo 
Go print all around the world 
(What)'chu want markets? 
Are you ready to inflate? Now! 

(2nd Chorus)


End song

Leo Kolivakis's picture

"The American economy will never recover until consumer spending drops back to the 64% range that indicates a balanced economic system."

Why is that? This seems rather simplistic, to say that consumption (and by extension, savings) have to revert back to some historic mean. We live in an internet era, which means it's easier to consume from the comforts of your home. Whether or not all this consumption benefits people or the environment is another matter.

old_turk's picture

Leo, Leo, Leo

Systems revert back to the mean, it is the way things (systems, natural and otherwise) work. 

Economies (and by extension, economists) hate disequilibrium.  Soros has made billions working that angle ... policy made by those fighting for the status quo, and equilibrium wins every time.

Spalding_Smailes's picture

If they don't restart the securitization market they are not reverting back to shit.

A_MacLaren's picture

Are the lenses of your all spectacles rose colored Leo?

DarkAgeAhead's picture

There is no form of current consumption that benefits the environment.  All destroys.  It's merely a matter of how efficiently.

That said, paradigm shift is possible, but unlikely given our current crop of environmental leaders.  Environmentalism is as badly broken as the market right now, even as the most severe ecological depression in 65 million years deepens. 

This is what the world's leading biodiversity researcher labels as..."The Death of Birth."

malek's picture

Your only logical solution is suicide.

But on the other hand the organisms in the oceans also drove up the share of oxygen, poisoning the atmosphere a few billion years ago - and look what we have today.

JR's picture

“Consumer spending as a percentage of GDP is still above 70%.” – Jim Quinn

Wall Street and the government blame us for what they do!

Consumer spending is "the money that people pull out of their paychecks and bank accounts to pay for domestically-produced goods and services." Whoa! So, you'd think that's what would show up on the consumer spending charts, right? NO! That comes to only 40% of the total of the BEA's so-called ‘personal consumption expenditures,'" says Michael Mandel.

The rest, you wouldn’t believe, is a bizarre collection of former taxpayer dollars and social and producer expenditures and guesstimates bouncing through the hands of government, businesses, banks, individuals forced to pay fees and those spending governemnt transfer payments. And many are just entries which make the government’s economic books balance.

Mandel's revealing profile on Bloomberg Businessweek of the misuse of the consumer spending category is only further evidence of how the government manufacturers an economic picture that favors more government spending and manipulation, and blames it on the people's "greed."

Said Michael Mandel on August 29, 2009, ‘[I]n fact, ‘personal consumption expenditures’ in the U.S. is a grab-bag category which includes all sorts of money—like Medicare spending by the government—which never passes through the hands of households. PCE also includes all the consumer goods imported into the U.S.—cars, computers, clothing, and the like—which create very little economic activity in this country.”

Mandel divided the PCE into five categories (from largest to smallest in billions of dollars expended): 1) Primarily domestic goods and services 2) Import-intensive goods 3) ‘Imputed” services 4) Healthcare goods and services 5) Social services, religious activities, R&D and similar acitivies.

For instance, in just one of these “wonderful categories”—healthcare goods and services, including hospitals, drugs, doctors, nursing homes, and health insurance—“because of the vagaries of national income accounting, most of the money that the government pays for Medicare and Medicaid, and that businesses pay for employer health insurance, shows up in the PCE category… in fact, only about (roughly!) 15% of healthcare spending is ‘out of pocket.”

The #5 catch-all category even includes spending by political parties and the food and housing relief provided by the Catholic Church!

My point is, why bother—why not just make it all up?

RandomRick's picture

...Reagan, Bush I, Clinton, Bush II and finally Obama to send us over the cliff! Life wasn't that good under Carter either. This is not a good legacy for the American presidential series and our two party system. What's next?