Guest Post: Consumer Credit And The American Conundrum

Tyler Durden's picture

Submitted by Lance Roberts of StreetTalk Advisors

Consumer Credit And The American Conundrum

What to do?  This is not as an innocuous question as one might think.  For most American families, who have to balance their living standards to their income, face this conundrum each and every month.  Today, more than ever, the walk to the end of the driveway has become a dreaded thing as bills loom large in the dark crevices of the mailbox.  What to do?

The conundrum exists because there is not enough money to cover the costs of the current living standard.  The average family of four have few choices available to them.  The burden of debt that was accumulated during the credit boom can't simply be disposed of.  Many can't sell their house because 1 in 4 homes are worth less than what they owe.  There is no ability to substantially increase disposable incomes because of a weak employment environment and deflationary wage pressures.  Despite the mainstream spin on recent statistical economic improvements the burdens on the average American family are increasing.  Nothing brought this to light more than yesterday's release of consumer credit data which rose $19 billion following a $20 billion increase in November. 

However, after the release yesterday the headlines were replete with commentators talking about the "end of the consumer deleveraging cycle".   Joe Weisenthal wrote yesterday at Business Insider "It's hard to think that the economy is going into any kind of recession with numbers like these. For the second straight month we just got a HUGE number on consumer credit.  Consumer credit expanded by $19 billion in December. That's far more than the $7 billion that was expected by economists.  Revolving consumer credit (credit cards) grew by $4.1 billion sequentially, and is basically flat from last year again (up barely).

One more point on this: A lot of people think that US consumer has too much debt, and that a big number here is 'bad' and we could imagine that being true. But if we're talking about cycles, and whether the economy is in rebound or recession mode, re-expanding credit is OBVIOUSLY what you want to see."

consumer-spending-wages-020812Under more normal circumstances Joe would absolutely be correct.  Rising consumer credit means more consumption which leads to stronger economic growth.  Let me explain.  Individuals go to work to produce a good or service for which they are paid a finite amount of money for.  With that income they pay taxes which leaves them with discretionary income from which to live on.  Pay the rent, utilities, insurance and healthcare, food, clothes and put gas in the car and that pretty much consumes the majority of the paycheck. 

Therefore, in the past, if they wanted to expand their consumption beyond the constraint of incomes they turned to credit in order to leverage their consumptive purchasing power. Steadily declining interest rates and lax lending standards put excess credit in the hands of every American.  (Seriously, my dog Jake got a Visa in 1999 with a $5000 credit limit)  This is why during the 80's and 90's, as the ease of credit permeated its way through the system, the standard of living rose in America even while economic growth rate slowed in America along with incomes.

Therefore, as the gap between the "desired" living standard and disposable income expanded it led to a decrease in the personal savings rates and increase in leverage.  It is a simple function of math. 

pce-consumerdebt-020812Today, the situation is quite different and a harbinger of potentially bigger problems ahead.  The consumer is no longer turning to credit to leverage UP consumption - they are turning to credit to maintain their current living needs. 

Take a look at the chart of personal consumption expenditures (PCE) versus total consumer credit.  Notice in the past year as consumer credit rose you saw an increase in PCE.  In the last two months consumer credit has exploded higher but there has been virtually NO increase in PCE levels on a month over month basis.  Retail sales during the Christmas shopping season we disappointing and this was even with a large decrease in gasoline prices.

This situation becomes even more apparent when we begin to look at the longer term trends of real disposable incomes, consumer credit and personal saving rates. 

debt-consumerdebt-incomes-020812Most of the deleveraging process that has been occurring up to this point has NOT been voluntary.  Banks have been cutting off excess credit lines, consumers have been defaulting on debt, mortgage foreclosures, and personal bankruptcies.  Consumers, on the other hand, are struggling just to make ends meet and are in reality doing very little in terms of voluntary debt reduction.  As incomes have decreased over the past two years - the inflationary pressures in food, energy, medical and utilities have consumed more of that declining wage base.  This is why today we have 1 out of every 2 Americans on some form of governmental assistance, more than 47 million people on food stamps and transfer receipts making up more than 35% of personal incomes.  It is hard to make the claim that the economy is on a fast track to recovery with statistics like that.  That is why the recent increases in consumer debt are disturbing.  The rise in NOT about increasing consumption by buying more "stuff" it is about just about being able to purchase the same amount of "stuff" to maintain the current standard of living.

Yes, the economic data has certainly shown some signs of picking up as of late.  However, if you go ask your neighbor, co-worker or small business on the corner the answer you get back will probably surprise you.  The struggle to survive from one paycheck to the next  is a reality for most American's today.  It is very reminiscent of 1980 when Dolly Parton penned the lyrics for the movie "9 to 5" to wit:

Workin' nine to five
What a way to make a livin'
Barely gettin' by
It's all takin' and no givin'
They just use your mind
And you never get the credit
It's enough to drive you
Crazy if you let it

Nine to five, yeah
They got you where they want you
There's a better life
And you think about it, don't you?
It's a rich man's game
No matter what they call it
And you spend your life
Puttin' money in his wallet

Those words will certainly resonate for those of the age 16-24, who weren't even alive when the movie was made, that are part of Occupy Wall Street and are protesting the "rich man" because they feel oppressed by the system.  For that age group 1 in 4 are unemployed and they are living back home with parents.   In turn, parents are now part of the "sandwich generation" that are caught between taking care of kids and elderly parents.  The rise in medical costs and healthcare goes unabated consuming more of their incomes.  The deleveraging cycle has only likely been put temporarily on hold.  The recent increases in consumer debt without corresponding increases in personal consumption are concerning to say the least. 

Hopefully, the recent upticks in the economic data are more than just temporary bounces post the economic crisis of last summer.  Hopefully, the recent improvements in employment, while mostly temporary hires, will translate into higher incomes in the future.  Hopefully, the recession in the Eurozone, which accounts for about 1/5th of exports and incomes to U.S. corporations, will not negatively impact the U.S..  Hopefully, the U.S. can begin to reduce to long term deficits and get the country back onto a sustainable growth trend.

That is an awful lot of hoping.

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DCFusor's picture

Slow, aren't we - this hasn't just's been going on for a long time now - and that "money pulled out of the market and sitting on the sidelines" ain't - it paid for groceries and gasoline, just ask any neighbor honest enough to tell you the truth.

MillionDollarBonus_'s picture

If the American consumer refuses spend, the only solution is for the government to pursue AGGRESSIVE fiscal stimulus programs. Bernanke becoming increasingly accommodative to this end, so congress has NO EXCUSE. We need decisive and meaningful fiscal stimulus NOW to boost aggregate demand and fuel our service economy. 


Vincent Vega's picture

Your shtick use to be kind of funny. It has become very boring.

nope-1004's picture

If you can't afford it, finance it!

Clearly no one can afford anything.  Too bad I can't short my indebted pig neighbor.


Clueless Economist's picture that you Krugman? bearded creep

zerotohero's picture

W.J. Whoopee your the man of the hour.

DrunkenMonkey's picture

Short of throwing bails of cash out of airships what are you suggesting ?

Years of 'accommodative' fiscal and monetary policy (in the face of declining 'real' wages) have brought us to this stage.

The period where we could afford the things we bought out of current earnings is long behind us, and wage increases that kept pace with inflation (in the things we need to survive, not ipads) were replaced by ever easier credit leaving us all in major debt.

So what is it ? 50 year mortgages ? Debts that revert to our children upon our deaths ? Or more money printing to keep oiling the squeeky wheel ?

Surely it is obvious that this is unsustainable, and will therefore come crashing down ?

Please, enough with the one-day-at-a-time thinking, it is starting to look like the Treasury is run by NA / AA members.

BlackholeDivestment's picture

DCFusor, that's called ''feeding the beast''. Lol

Newtons Lawyer's picture

I don't recall seeing it mentioned in the last couple of years that the interest rates on revolving debt are significantly higher than 4-5 years ago.  Banksters jacked rates from mid single digits to 20% in many cases and doubled or tripled minimum payments.  The only deleveraging going on is defaults.  Meanwhile the TBTF banks are given free reign to rape and pillage just so they can make an effort to become solvent.  Hopefully they don't succeed.

BLOTTO's picture

Gordon Gekko: The richest one percent of this country owns half our country's wealth, five trillion dollars. One third of that comes from hard work, two thirds comes from inheritance, interest on interest accumulating to widows and idiot sons and what I do, stock and real estate speculation. It's bullshit. You got ninety percent of the American public out there with little or no net worth. I create nothing. I own. We make the rules, pal. The news, war, peace, famine, upheaval, the price per paper clip. We pick that rabbit out of the hat while everybody sits out there wondering how the hell we did it. Now you're not naive enough to think we're living in a democracy, are you buddy? It's the free market. And you're a part of it. You've got that killer instinct. Stick around pal, I've still got a lot to teach you.

1987~Wall Street~

The trend is your friend's picture

One of my ALL TIME favorite lines of any movie

HungrySeagull's picture

Wallstreet. Ah yea. Right up there with Hudsucker Proxy for me.

John Law Lives's picture

Ditto that.  Michael Douglas was born to play that charcter.

LooseLee's picture

You are nothing more than a"wanna-be" man. You create nothing and in the end will receive nothing. You live off of the 'ignorance' of others. A man like me will annihilate you in any physical or intellectual exercise. I can't wait until this 'country boy' meets up with a 'city boy' like you real soon...Calling all 'Financials'.....let's see what you have to hide behind when confronted with a 'ringer' you never dreamed existed...

The trend is your friend's picture

Start Spreadin the news thiers HOPIUM today.....i want to be a part of it....Hopium.....hopium

TheMerryPrankster's picture

I think you're pipe is going out. Better find your BIC.

Irish66's picture

OT>  All this guest posts, do they just come to Zerohedge or out to other people?

If these posts are hitting a huge population, why is anyone in the market?


The trend is your friend's picture


You are a part of a small group of people.  Look at the average reads on the articles. It Averages 6-7k reads from a wordwide audience.  if more people read ZH the market would crash 

Irish66's picture

So my question is then these articles are just written for Zero?

azzhatter's picture

Most are ZH but some are from outside sources. ZH is not a news aggregator. There's some really smart Tyler dude(s) that write this stuff

Orly's picture

Most of the articles are submitted with permissions from outside sources.  Lance Roberts is a financial advisor in Houston, Texas...and a very nice fellow, too.

He has a radio show on KSEV radio that airs at 6pm central on weeknights.


earleflorida's picture

we're almost ready to go beyond 50k reads shortly, what bothers me the most about this,... is having to read 1200+/+ comments per post

go ZH


baby_BLYTHE's picture

believe it or not there are people out there that actually believe another market crash is an impossibility going forward due to QE. Back before the invitition of computers QE would have meant actual money printing and physical delivery of paper currency to banks and primary dealers. Imagine what that would do for inflation expectations today? No way the FED would get away ZIRPing and printing 4eva.

carbonmutant's picture

"The consumer is no longer turning to credit to leverage UP consumption - they are turning to credit to maintain their current living needs."

In fact they're moving from credit cards to cellphones  - NFC

Agent P's picture

Coming soon to a $300 smartphone (+$150/month phone plan) near you...trend moving toward people transacting in credit on a device they need credit to afford...kind of ironic, don't you think?


TheMerryPrankster's picture

Ironic or suicidal. Think of the data mining profile that can be built using GPS, credit card and the time server, time stamps.

They know what you bought, where you bought it, how much you bought, where you travel to, when you are awake and asleep, who you talk to, what you talk about and assorted other facts that only become evident when you mash all the data together and extrapolate.

How ironic, electronic handcuffs that you pay to wear, that pick your pockets and snitch you out. Some people line up around the block to be the first to own the latest model with the newest electronic hand cuffs. We are knee deep in dolts, submerged in clueless, drowning in stupidity.

What's next a gun that shoots you and then calls 911? There's an app for that.

pods's picture

Why does the term "sustainable growth" make me laugh?

Laugh in a way like when you realize how fucked we really are.

And then wonder why everyone wants to go back to the same exact thing that got us here to begin with?


Scisco's picture

For anyone that doesn't understand the joke, watch this. It is a very important concept to grasp.

zerotohero's picture


zerotohero's picture

Oh and another thing - here's a GROWTH idea for the public - GROW some balls and vote Ron Paul.

Shizzmoney's picture

Consumers are obviously betting that the Mayans were right about 2012.

And we all know who the big winners are for an impending Apocalypse - and it ain't Visa or American Express.

TheMerryPrankster's picture

The Mayans were right, the calendar does end in December, but on the 31st.

Silly old world, full of silly old people, repeating the same mistakes.

Day after day, year after year, generation after generation. We laugh cause we can't cry.

Budha sought eternal bliss in the belief it would allow him to die and not reincarnate. He wanted off the treadmill.

HungrySeagull's picture

Far too late now.

It would be easier to get a Camel through the Needle Eye than it is to simply say "Debt Jubiliee" and restart everything all over again.

Out with the old, in with the new.


It wont happen. If it is going to hit our young, it's already done through student loans that can never be repaid. Indeed if inflation takes hold regardless of what Ben wants or does not want, the Government might be forced to simply say "Forget it" to student loans.

And then tax every debtor according to the amount of debt that was written off.


On ZH recently there was a Greek Court that ruled a person with current bills beyond income can simply shed them.


The Nation has failed, yes failed to maintain the books for over a thousand days now. Vote this, spend that, give it all to whatever without a thought to the actual costs which are spiraling beyond what anyone in Congress will even speak publicly.

Forget about hoping. Just do.

We are somewhat breaking even as it stands now, having already made draconian choices and execute them no matter the cost, pain and stress.

No more debt. It's that simple.


And it is the little simple spark that burns a great forest.

Beam Me Up Scotty's picture

So a person should apply for all the credit cards you can, and max them out on gold and silver and declare bankruptcy?  If you didn't need any credit in the future, that might be the ticket.

TruthInSunshine's picture

One doesn't need to declare BK, necessarily.

I had a client who was worth 8 figures (upper 8s, on paper at least - but paper counted back then) back in the mid 2000s, who, after basically losing it all, charged up his AMEX Black Card and some other premium cards to the hilt (I believe he charged in excess of 300k on multiple cards), and simply said "piss off" when they called him to harangue him about his non-payment.

By the time they got around to thinking about suing him for unpaid debt, they found that the line was a little bit too long, and the liens and judments were piled a little too deep, to have any real shot of success.

He then turned 'debt negotiations' into a game, for whatever reason, and got them to agree to a settlement of around anywhere from 12 to 16 cents on the dollar, before he let them know that he couldn't even afford that, and to go ahead and sue him.

niktamere's picture

You're givin me ideas, my man

GeneMarchbanks's picture

And that's just some of the domestic problems. The much bigger issue is that the reserve currency boost is dying away daily and that the 'nation' is run by monopolistic psychopaths who are oblivious and more desperate by the minute. It'll reverse itself soon though I'm sure.


Vincent Vega's picture

Quick, give the sheeple more SNAP cards!  /sarc

azzhatter's picture

You can't have it both ways, somebody is lying. Bennie says steady on the throttle for ZIRP, economy is fragile. MSM pundits and experts say happy days are here again, jackoffs like Cramer spew utter bullshit. Which one is it "A fragile boom?"

or a "Booming bust?"

WonderDawg's picture

It's a fine line they walk. It helps to have the MSM as your propoganda machine, and a population with the attention span of an E-Trade commercial. The whipsaw between hope and fear keeps the population confused but at the same time, mentally sedated. Amazing, really. Quite ingenious.

tony bonn's picture

"That is an awful lot of hoping."

i can guess for whom you voted in 2008 and why i think that all of your hoping is for nought....of course the alternative candidate was just as big a loser as yours....

the economy will not and cannot recover under its current shove your hope up your ass....

taniquetil's picture

If you do the math on consumer debt numbers the average American holds 4 credit cards and about $8300 in debt. About half of that $8300 is credit card debt.


God help us all.

VelvetHog's picture

With only 30% of homes owned free and clear how can the average debt per American only be $8300?

taniquetil's picture

Consumer debt doesn't include mortgages.

Vincent Vega's picture

According to total debt per citizen is $50,878 which is mortgage, revolving and non revolving credit....just sayin'

TruthInSunshine's picture

It's actually over $200,000 per citizen if David M. Walker, the former Chief Comptroller of the United States, is to be believed (or $700,000 per anyone who currently pays net taxes), based on what he has come with as a pretty concrete Debt of 61 trillion USD (that was as of 18 months ago, so add...I don't know...a couple trillion).

Kotlikoff pins it 3.3x as high as Walker, so that's a cool 2.4 million per net taxpaying citizen.

Nov 17, 2011 – Laurence Kotlikoff, professor of economics at Boston University, talks with Bloomberg's Tom Keene about a U.S. fiscal gap of $211 trillion.