Our Marginal Economy

Tyler Durden's picture

Submitted by Charles Hugh-Smith of OfTwoMinds blog,

Before you jump on the Bull market bandwagon of "don't fight the Fed," perhaps you should take a look at the quality of the debt the Fed has enabled and the diminishing returns on all that debt.

The mainstream media is delighted to highlight positive economic data, but nobody ever asks about the quality of the borrowers who are behind the rosy numbers. Behind the rosy numbers, sales and profits are increasingly dependent on marginal buyers and borrowers: those buying on credit who would not qualify to borrow money in a system ruled by prudent risk-management.

These marginal borrower/buyers are last on, first off: they qualify for loans at the end of a credit expansion, when lenders throw caution to the winds to reap the profits from issuing new mortgages, auto loans, student loans, credit cards, etc. to marginal borrowers.

These marginal borrowers are the first to default, because they have insufficient income and collateral to support their loans.

This rising dependence on marginal borrowers/buyers leads to an economy of diminishing returns: ever-rising rates of debt expansion are required to generate ever-declining rates of expansion of sales, profits, GDP, etc.

The waterfall decline of the quality of debt-based sales is masked by the rosy headline numbers. Auto sales are soaring; nice, but does anyone ask how many of those vehicles were sold to marginal buyers, the kind of borrowers who are one paycheck away from insolvency and default?

How many issuers of junk bonds are one recession away from insolvency and default?

Let's look at a few examples of diminishing returns/dependence on rising debt for marginal returns. Once again, we must keep in mind the quality of the debt and the borrowers is not revealed in rosy headline numbers.

Anecdotally, I see plenty of people who defaulted/declared bankruptcy in previous downturns who are once again in hock to the hilt, and they know the drill: borrow and spend as much as you can, because all you have to do is stop paying.

Yes, your credit score will be lousy for a few years, but lenders and retailers are so desperate for sales that you won't have to wait long to start getting a flood of credit card offers in your mailbox. After all, anyone with a pulse can buy a car now.

Here's total credit and GDP: this screams "diminishing returns":

The Fed's "free-money for financiers" balance sheet and the S&P 500: once again, this screams "diminishing returns:"

Money velocity: diminishing returns:

Small biz: fading at the margins:

Federal student loans: this fairly screams, "go ahead and default, there is literally no risk management here":

The return on a college degree? Diminishing faster than you can say "default":

Labor participation and real median income: diminishing returns on all the outlandish money pumping and Federal deficit spending:

Fulltime employment: going nowhere after 5+ years of unprecedented expansion of central bank "free money for financiers" and Federal debt:

Real household income: declining for all but the top 5%:

Household income has declined significantly in real terms: Five Decades of Middle Class Wages (Doug Short).

Federal Reserve "free money for financiers" has greatly expanded wealth inequality:

So before you jump on the Bull market bandwagon of "don't fight the Fed," perhaps you should take a look at the quality of the debt the Fed has enabled and the diminishing returns on all that debt.

Comment viewing options

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

Fantastic Chart Porn!!  If we make it through the rest of year, I will be surprised.  I still think we get through to S&P 2040 before the real fallout begins!!

NOTaREALmerican's picture

Overall, a good article.  At least some new chart porn.    We'll make it through the end of the year without any problems.      This won't end until somebody big doesn't accept payment.     That's the only black-swan the Fed hasn't shot out of the sky.

Cognitive Dissonance's picture

I can't wait until they start issuing 10 year auto loans and 50-100 year mortgages.

Let the games begin.

LawsofPhysics's picture

Already happening in many countries.   Ownership has its privileges...

Cognitive Dissonance's picture

Yes, Japan in fact has the 100 year mortgage. I'm jealous. Can my housing debt be involuntarily transferred to my children at my death? Please say yes.  /sarc

youngman's picture

It just doesnt matter anymore.....the Fed does what it does...if it needs a few more trillion..it will print it to save itself..

tickhound's picture

"It will print to save itself"

And that's the entire rationale for everything... To protect the system, to protect itself as an institution. It has no problem being the primary bag holder. Sending itself to collections is you agreeing to meet payments with your image in the mirror. It's lies, price manipulation, and a merry-go-round of institutional clowns who will run this show... To manipulate confidence. Confidence is the thread holding this shit-pile together. Bankruptcy, as we know it, can't happen to a central bank. But a bankruptcy in confidence... that's where we are now, but the lights are still on and the groceries are on the shelves...

101 years and counting's picture

look at all that debt!  it means the bailouts will be 4-5x bigger the next time.  BULLISH!!!


yogibear's picture

Larger and larger fails and debt until all of it is cleared (defaulted). The banksters just transferred it to the government which makes it more insolvent. A some point the US does a Japan.

Japan may blowup soon.

yogibear's picture

The Federal Reserve is stuck printing and buying treasuries (even back-door through overseas accounts ) until the US dollar blows up.

The Federal Reserve's balance sheet is mark-to-fantasy. Fractionally accounting for debt.

A game of ever-increasing and crippling debt.

LawsofPhysics's picture

"The world's balance sheet is mark-to-fantasy" -  fixed. 

hairball48's picture

Being one of ZeroHedge's "poorer" readers, I can tell you that all the low income people I see and work with every day are absolutely oblivious to what's going on. They spend every nickle they earn on bullshit. Tattoos "ink" is a favorite these days.

They live pay check to paycheck and borrow when they can to keep partying on.

I see all sorts of young folks in their teens and 20's who wander around town dressed like bums.

I hear the young folks talking at my apartment in the evening. They have NO CLUE what is going on. And some of the conspiracy theories they have about government and the economy are just too bizarre to retell. Totally off the wall.

So when the shit hits the fan "this time", I'm afraid it is going to be very ugly--deadly in fact.

NOTaREALmerican's picture

The Trash Class has always killed each other, they've neven known who the enemy is.  The top 10% are completely safe.   The Trash Class doesn't even know where they live.

RaceToTheBottom's picture

All it takes is a few organizers.

Totentänzerlied's picture

The Jacquerie is my go-to example for how that works. There are dozens of other comparable documented examples, thousands if you expand the timeframe and geographic area, from the smallest rural revolt to the French, Chinese, or Russian civil wars (aka Revolutions). They all ended exactly the same way.


daveO's picture

At least, those peasants were raised, with an entitlement mentality, by the state.

hairball48's picture

Maybe I should clarify my earlier remarks...

I'm talking about far more than the "trash class". "Poor and modest income" does not necessarily mean "trashy". Although I take your point about the dregs of society, and I agree.

I see and know many good solid middle/low income folks who are clueless as well. Well meaning people who are spending all they have and incurring ever more debt--if they can take more on.

This money and debt  creation is going to end badly for more than just the bottom feeders. Some of those top 1% who can't pour piss out of a boot in any practical sense are going to find themselves in a very bad situation. Many of the top 1% believe they are "above it all".

We'll see.

Totentänzerlied's picture

A Cessna at a local private airfield with a well-compensated private pilot on call 24/7 (or a well-stocked yacht at the local docks) is the solution to that problem.

Survivalists aren't the only ones who know about bugging out. They'll spend the next civil war sipping champagne in Monaco or gambling in Macau. Or for the paranoid, in their secure private compounds at remote locations in South America, Canada, etc.

SF beatnik's picture

One might argue that just before a hyperinflation it makes good sense to borrow and spend every nickel you can for tangibles that you can pay for later in funny money.

I suspect that tens of millions of US borrowers have learned over the years that you don't really have to pay back the money if you're not living the straight life.

Totentänzerlied's picture

Wish I could give this a few hundred upvotes.


JRobby's picture

They are lapping up the Tea on SS. Easy to understand when everything costs so much and real wages are stalled 30 years. When you tell them you have been paying in to it for 40 years they just blank out. The number is not real for them. They are the ones who will be shouldered with the additional taxes (premiums, chuckles)


And this later in the day from Bruce Krasting. Thanks Bruce


NOTaREALmerican's picture

Just another article by a socialist hippy who hates success, and the troops.

hairball48's picture

What makes you(and others to be fair) believe the author is a socialist?

He's a "libertarian", and a pretty obvious libertarian from my point of view

JRobby's picture

Were you part of that reading comprehension study?

Xandrino's picture

But debt is good right?




TheRideNeverEnds's picture

another day, another V bottom and furious buying ramp all day.


every day is higher lows and higher highs so nothing else matters; we are going higher.

JRobby's picture

quality of the debt (laugh track deafening)

RaceToTheBottom's picture

Some of the old timers might be able to answer this question:


Why is there not sections of the ZH Website where the discussion can be subject driven rather than news driven?.  

Example Gold/Silver related to Fiat currencies.   There are many really nice posts here that I would love to remember and go back and discuss, but unless they are very timely, based on news, they will not get read.

Some other subjects that people feel strongly about might be Education, Russia, Outsourcing, etc

It would be nice to have subject driven sections to supplement the news driven ones.  This must have come up, what was the reasoning not having it?


hairball48's picture

I suspect that the sort of forum you suggest is just not "ZH's thing". They have their plate full doing what they do

JRobby's picture

Could be that the exhausted condition of the fiat/debt based world monetary system is actually the driving factor behind the "news worthy" events.

Professorlocknload's picture

Marginal Debt? What's the difference? The Fed will buy it all.

hairball48's picture

Until they can't/don't/won't buy it.

Then what? :)

chomu's picture

It was the FED that baught the naked calls I sold on TWTR. DAMN THEM!


I default...or need some of this easy credit to pay them

theyjustcantstop's picture

why would the fed quit printing money?

they have the full faith and backing of all americas assets.

when the crash comes, the banks close, and these ideas floating around, gates on mmf, and myras for your 401k's, after a short meeting around a small table will become law, the same day, national security.

then after a fully staffed irs, aided by nsa, and others move a few decimal points around, the banks will reopen.

hopefylly you have something in the freezer, or cubards to last a few days, we know the ebt cards will work, but not sure about bank-cards if they'll be disabled, or a maximum put on them, but one thing for sure, you don't to be out shopping with those 47%, ( that don't exsist according to the democrats ), their not real polite while empting wal-marts shelves. 

then you'll recieve notice, or look up what it will cost to get money out of your mmf, and you'll look-up your 401k info. with an irs attachment of what you'll owe in taxes for all your long term income, is now short term income for this tax year, then you'll recieve notice what your penalty will for taking your money out of some investments early, then the best of all, the brokorage fees.