Consumer Credit Trends Shifting

Tim Iacono reviews data compiled on EconomPicData that reveals American consumers are ratcheting down their use of credit cards, dropping toward 15% of personal income. Consumer debt has been rising for decades, but now it is being replaced by student loan debt, which has increased dramatically in the last 10 years to approach 5% of personal income. Iacono believes this will likely cause problems in the long term as getting an education begins to look less appealing and eventually impacts U.S. competitiveness in the global market. For more on this continue reading the following article from Tim Iacono.

From this item at Jake’s EconomPicData blog the other day comes the graphic below depicting dramatic changes in consumer credit trends over the years. Racking up revolving credit (e.g., credit cards) is not nearly as popular as it was for decades, what I’ve long called “the real Reagan Revolution” as individuals dramatically increased their use of credit cards to fuel consumption (i.e., buying things you don’t need with money you don’t have).

Taking up the slack for falling credit card balances are higher student loan balances that, already, are further separating the nation into have and have-nots (a.k.a. debt serfs) while making the whole idea of higher education less appealing when this is one the the things the country needs most to remain competitive with emerging economies in Asia.

This blog post was republished with permission from Tim Iacono.

Ross Perot Prophecy Comes True

Economist Tim Iacono reflects on the wisdom of Ross Perot during the 1992 Presidential election. He highlights a video made of a debate between Bush, Clinton and Perot wherein Perot warns of a wage convergence between Mexico and the U.S., and notes how now the country at issue is China as their wages climb while America’s falls. Meanwhile, he notes, everyone is too busy talking about taxing and spending to take note of the problem. For more on this continue reading the following article from Tim Iacono.

Spotted over at Patrick.net this morning, 1992 Presidential candidate Ross Perot’s warning about a steady decline in U.S. wages from almost 20 years ago sounds quite prophetic. All you have to do is substitute “China” for “Mexico” when you hear about wages converging at six dollars an hour – ours going down, theirs going up.

Sadly, no one talks about his much – instead, you get a political debate about taxes and spending. And, of course, monetary policy at the Federal Reserve that is largely based on a consumer price index that doesn’t distinguish between imported goods and goods that are produced domestically only exacerbates the problem.

This blog post was republished with permission from Tim Iacono.

Majority of Americans Practice Poor Financial Planning

The National Bureau of Economic Research has released a report critical of American investing practices. The study indicates that most Americans are financially illiterate, and do not understand fundamental concepts regarding their borrowing practices or the dynamics of finance. People often borrow or enter into mortgages without understanding their interest rates or terms, and increasingly use risky high-interest forms of financing like payday loans and tax refund advances. This along with a seeming addiction to credit and aversion to saving has experts warning of future economic shocks stemming from large-scale personal finance mismanagement. For more on this continue reading the following article from Tim Iacono.

It’s impossible to predict what the personal finances of hundreds of millions of Americans will be like in 10, 20, or 50 years, but one thing seems certain – they’ll look back at the late-20th and early-21st century and marvel at what happened. From a nation of diligent savers where a reasonable return could be earned on risk-free investments and everyone worked toward paying off their mortgage, we’ve gradually turned into a nation of credit junkies who fall into two investment camps – increasingly destitute, risk-averse savers and speculators reaching for a higher return, many of whom will end up destitute as well.

Confirmation that we might be getting a little closer to the end of this trend and about to begin whatever phase comes next arrived in two reports this week. First, from the National Bureau of Economic Research comes a new study that indicates we Americans don’t seem to do much right these days in managing our money.

The findings reported in this work paint a troubling picture of the state of financial capability in the United States. The majority of Americans do not plan for predictable events such as retirement or children’s college education. Most importantly, people do not make provisions for unexpected events and emergencies, leaving themselves and the economy exposed to shocks. To understand financial capability, it is important to look not only at assets but also at debt and debt management, as an increasingly large portion of the population carry debt. In managing debt, Americans engage in behaviors that can generate large expenses, such as sizable interest payments and fees. Moreover, more than one in five Americans has used alternative (and often costly) borrowing methods (payday loans, advances on tax refunds, pawn shops, etc.) in the past five years. The most worrisome finding is that many people do not seem well informed and knowledgeable about their terms of borrowing; a sizeable group does not know the terms of their mortgages or the interest rates they pay on their loans. Finally, the majority of Americans lack basic numeracy and knowledge of fundamental economic principles such as the workings of inflation, risk diversification, and the relationship between asset prices and interest rates.

You can purchase the report for $5 from NBER or have a look at some additional details in this item over at the Wall Street Journal Economics blog, but, it seems clear that the too-big-to-fail banks have millions of Americans right where they want them – dumb and in debt – and even Elizabeth Warren might not be able to save them.

When it comes to investing (i.e., for those Americans who aren’t living paycheck to paycheck while struggling with debt up to their eyeballs), things aren’t much better as the double-whammy of poor instincts and being taught poorly have investors failing to achieve their potential as detailed in this report at MarketWatch.

It might be a stretch to say that Americans, in general, are failures when it comes to investing. But given the amount of time and attention spent teaching people how to be savvy about all things money, it sure seems that way.

We simply haven’t moved the needle all that much. That seemed to be the consensus of the world-renowned experts who spoke at the recent Life-Cycle Saving & Investing Conference at Boston University.

It’s not that investors don’t understand how the economy and markets work, though that is a problem. The problem is that we have — recent trends notwithstanding — a low savings rate and high personal debt. What’s more, average investors typically have poor investment results, with various studies suggesting they tend to buy high and sell low, or trade frequently and at the wrong times.

We keep trying to teach people (children, teenagers, young adults, 401(k) participants and the like) about money at all the wrong times, using all the wrong formats and methods of delivery.

Experts said the time is now to think differently about how we teach people about investing, with some advocating for increased use of financial entertainment, or what some call edutainment. Others are calling for increased use of just-in-time learning programs, and still others say this nation needs to address the heart of the matter.
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At the core, one reason why Americans are illiterate when it comes to money and investing has to do with numeracy, Horan said. There’s simply a lack of it among the general population. And, “when we look at the efficacy of financial literacy programs the evidence is not all that compelling,” said Horan.

Horan said that Lauren Willis, a professor at Loyola Law School, published a paper in 2008 in which Willis noted that financial education, for some consumers, appears to increase confidence without improving ability, leading to worse decisions.

I suppose, in the case of investing, you could say that Wall Street firms have millions of Americans right where they want them – confused and reaching for yield.

The “numeracy” problem cited in both reports is something that I find hard to fully appreciate, given my math/engineering background, but it sure does seem to be a problem with no easy solution in sight given the increasingly complex financial world we live in.

This post was republished with permission from The Mess That Greenspan Made.

Many Americans Still Stressed Out About Debt

While we wait to see the retail numbers from Memorial Day weekend sales, a report indicates that American's level of debt-related stress has remained virtually unchanged over the past year despite credit card debt declining slightly. The survey cited by the AP found that families with incomes of over $50,000 cut their credit card debt in half over the past year. See the following post from The Mess That Greenspan Made.


A few gems from this AP report about a recent survey they conducted along with GfK Roper Public Affairs & Media in which little or no improvement was seen in debt-related stress from a year ago – just after the worst of the financial market crisis.

The average amount owed on credit cards is $3,900, the poll said. That’s down from $5,600 in the fall and $4,900 last spring.

Families with incomes over $50,000 have sliced their credit card debt by more than half, yet their stress from debt hasn’t changed much — it’s moderately low. Families with incomes under $50,000, however, have added only slightly to their debt, while their stress level rose sharply.
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Paul J. Lavrakas, a research psychologist and AP consultant who analyzed the AP-GfK survey, finds that among those with the most stress from debt are women, married couples, people age 30-44, and the poor — households with incomes less than $20,000.

Those with the least debt stress include men, retired people, single people, those 60 and older, and the wealthy — households with incomes greater than $100,000, he says.

Last year, Democrats felt better about their finances than Republicans, despite generally being in worse shape. That sense seems to have worn off: Democrats now report higher debt stress levels on average than Republicans.

Remarkably, those with little or no debt have little or no stress when it comes to that debt, living within ones means having a clear advantage for some people. Of course, these modest spenders may not have as many big screen TVs, jets skis, and RVs either, consumer purchases that, while clear “debt enhancers”, have proven to be great “stress relievers”.

This post has been republished from Tim Iacono's blog, The Mess That Greenspan Made.

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.