Friday, April 9, 2010

Consumer Debt Continues To Contract

In February, the amount of consumer credit declined by five percent, which was worse than economists projected. A true recovery will be almost impossible while consumer credit continues contracting, which makes it likely that the Federal Reserve will continue to attempt to stimulate the economy by printing money and decreasing the value of the dollar. See the following post from Expected Returns.

Consumer credit continues to contract while many measures of unemployment hover near all-time highs, yet the worst is apparently behind us. Nevermind the fact that consumer credit contracted over 5% from last February, which by most accounts, was the worst of this recession. Since our economy functions largely on credit, these data just don't support the economic recovery thesis. From Bloomberg, Consumer Credit in U.S. Fell by Most in 3 Months:

Consumer credit in the U.S. declined in February more than anticipated, indicating Americans are reluctant to take on more debt without further improvement in the labor market.

Borrowing fell $11.5 billion, the most in three months, after a revised $10.6 billion January gain that was twice as much as initially estimated, the Federal Reserve said today in Washington. The decline in the February measure of credit card debt and non-revolving loans was worse than the lowest estimate in a Bloomberg News survey of 34 economists.

The drop was the 12th in 13 months and shows consumer purchases, which account for about 70 percent of the economy, will be limited until households become more optimistic about the recovery. Confidence to finance spending may be restored if employment keeps rising after a March payroll gain that was the biggest in three years.

Those who understand that consumption accounts for 70% of our economy are no doubt wondering what is driving this economic "recovery." Where exactly are underemployed and unemployed Americans getting the money to spend?

Oh right. The money must be coming from the wonderful government handout stimulus programs that are producing a whopping 5% GDP growth at the cost of only 10% annual deficits and trillions of dollars of new debt. What a fantasy world we live in where we think we can get something for nothing.

Strange, but it seems the much hyped Keynesian multiplier effect is stuck on reverse. Every stimulus dollar appears to be producing only a fraction of a dollar in growth. This is rather curious, but let's not focus too much on the costs of growth- that would be far too logical.

Rising Student Loan Debt, Falling Credit Card Debt
Borrowing in January was revised from a $5 billion gain, the first in a year and reflecting a jump in federal non- revolving loans, such as student loans. Such borrowing increased an unadjusted $13.9 billion in January, previously reported as a $10.3 billion gain.

Revolving debt, such as credit cards, declined by $9.4 billion in February, the most in three months, according to the Fed’s statistics. Non-revolving debt, including loans for cars and mobile homes, dropped by $2.1 billion. The Fed’s report doesn’t cover borrowing secured by real estate.

Consumer credit has been contracting for 12 of the last 13 months, with the only spike coming as a result of an increase in student loans- which reflects the rising costs of education and the cash-strapped state of parents. Expect more student protests of the Cal Berkeley kind as the costs of higher education become prohibitive and jobs remain scarce for young people.

Banks are trimming down their exposure to credit cards, which means Americans are finding it increasingly difficult to access credit. Since most Americans have minimal savings to fall back on, the contracting credit environment has the potential to render millions of Americans insolvent. If the secular trend in credit contraction persists, Ben Bernanke will surely bring out the helicopters and destroy the dollar.

As long as consumer credit contracts, we can have no sustainable recovery. The banking sector obviously isn't buying the hoopla surrounding an economic recovery since the supply of credit is falling month after month. The Fed is turning on the printing press non-stop to negate weakness in private lending, but not without unintended consequences as gold hovers at $1,150 dollars as we speak.

This post has been republished from Moses Kim's blog, Expected Returns.

1 comment:

Eric said...

Great commentary! We do find ourselves in a pickle. We are a debt-based economy. But when people finally realize they don't want to be in debt to any more banks, we lose our growth. I guess it is time to start having some serious brainstorming sessions for a new economic system. A system that does not require its citizens to be enslaved to ever-increasing debt to experience growth.

Keep up the good work,