Consumers Increase Debt for First Time in 4 Years

Here are the first signs of light at the end of the Balance Sheet Recession tunnel.  According to the NY Fed, consumers took on debt for the first time in 4 years in Q4:

NEW YORK—In its latest Household Debt and Credit Report, the Federal Reserve Bank of New York announced that in the fourth quarter of 2012 outstanding consumer debt increased slightly ($31 billion), breaking the downward trend observed since the fourth quarter of 2008.  The increase was primarily due to a rise in non-housing debt and the stabilization of mortgage debt.

Total consumer indebtedness was $11.34 trillion, 0.3 percent higher than the previous quarter but considerably lower than its peak of $12.68 trillion in the third quarter of 2008. While outstanding mortgage debt remained roughly flat, originations of new mortgages rose to $553 billion, a fifth consecutive quarterly increase.

Non-housing debt balances increased for the third straight quarter and now stand at $2.75 trillion, up 1.4 percent in the fourth quarter.  All non-housing components increased; auto loans up $15 billion, student loans up $10 billion and credit cards up $5 billion.

“The data provides early evidence that consumers may be reaching the end of the four year deleveraging cycle, though we’ll need to see if this is sustained in upcoming quarters,” said Andrew Haughwout, vice president and economist at the New York Fed. “At the same time, we observed mixed developments, mortgage originations increased and fewer accounts entered the foreclosure pipeline but delinquency rates remain considerably higher than pre-crisis levels.”

I think my estimate of the BSR ending in 2013/14 was probably a bit aggressive even though consumers are taking on more debt at present.  After all, this is a data series that has consistently averaged a 7% rate of change on an annualized basis and is presently sitting at 0% essentially.  So, we’re making progress, but there’s still a lot of work to be done here before the private sector can run with the baton.

Remember, we have a monetary system whose expansion is designed entirely around inside money or bank money.  So this is a crucial element in sustainable private sector expansion.  We’re trending in the right direction so no need to alter the course now.


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Cullen Roche

Mr. Roche is the Founder of Orcam Financial Group, LLC. Orcam is a financial services firm offering research, private advisory, institutional consulting and educational services.

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  1. Cullen — in your view, is an eventual return to the behavior that got us here (aggressive annual increases in household debt) a good thing or a bad thing in terms of overall economic growth sustainability?

  2. Depends. I love Werner’s disaggregation of credit theory. The idea that there are good and bad forms of credit. The bad forms of credit result in speculation, asset bubbles and disequilibrium within the economy. The good forms generate output, real growth and improve living standards. There’s a very high risk that the bad kind makes a comeback and it’s part of why I hate QE. I think it promotes the use of the bad kind of credit….

  3. Household debt to GDP in the US was always below 50% until the mid-1980’s, and peaked at around 98% in 2008/2009.

    We’re a little north of 80% as of Q3 2012 after massive household deleveraging. Do you think these are sustainable percentages? Do you think there is room for increases beyond the 2008/2009 peak? What is your ideal ratio?

  4. If debt is acquired to finance the acquisition of a (1) (new-security), the proceeds of which are used to finance plant & equipment expansion, or the construction of a new house, rather than the purchase of an (2) (existing-security) or to finance the purchase of an existing house (read bailout), or to finance (1) (inventory-expansion), rather than refinance (2) (existing-inventories).

    The former types of investment are designated as (1) “real” as contrasted to the latter (2), which constitute “financial” investment (existing homes).

    Financial investment provides a relatively insignificant demand for labor and materials and in some instances the over-all effects may actually be retarding to the economy.

    Compared to real investment, it is rather inconsequential as a contributor to employment and production. Only debt growing out of real investment or consumption makes an actual direct demand for labor & materials.

  5. The significant economic purposes for which a debt was contracted, its size, & the manner in which it is financed, determines its potential economic payback.

    If the monies represented by the deficits are spent on projects which increase productivity & reduce waste, the deficits are beneficial no matter how financed (thru savings or POMOs).

  6. I tend to agree with you, flow5. How/when will we know if the deficits have been invested productively, or if there the majority was mal-investment?

  7. I am concerned about Werner’s disaggregation issue as well.

    Is it possible to get a chart from FRED that shows the historical norm of HH debt/income ratio?

    Reason I say this is twofold: a) I beleieve when you look at the D/I ratio you will find that it is still very high over historical norms (and recall the I part has been in decrease lately), b) I believe that the D/I of the HH sector is a much better barometer of consumer debt levels and the state of the HH sector BSR than, sys, D/GDP.

    I guess I am not as optimistic as you are…

  8. How would you characterize student debt? 3/4 of the young (21-25 y.o.) employees I supervise are all pursuing higher (MA or MBA) degrees in the hope of having it translate to cash, but in this employment environment — with younger workers losing out to older workers — it seems about as wise as buying a lottery ticket. Most of these young people, BTW, are barely able to pay off existing college debt from their BA degrees. I hate to say it but I view all of this “degree accumulation” as nothing more than speculation of a sort.

  9. Total credit (TCMAH) has been growing on a YoY basis since 4Q 2010, and is growing (as of most recent 3Q 2012 data) at 2.4% YoY.

  10. Debt/Income mixes a stock and a flow. I prefer debt/assets or interest expense/income.

  11. Thats true.

    Just recall that D/I has been measured for about 40 years.

    I want to compare against historical norms.

    But I can go w/ the flow. Give me 40 years of those measures and I’m happy. (Although in the latter term, yearly debt payments in the form of principal & interest might shed more insight?).

  12. “Consumers MAY be reaching the end of THE four year deleveraging cycle” and “Delinquency rates remain considerably higher than pre-crisis levels” said Andrew Haughwout, VP & economist at the New York Fed.


    Mr Haughwout is saying that deleveraging (paying off debt) is almost at an end and yet people are still not paying their bills (paying off debt)?

    Which is it? Are they paying off their debt or not.

    My understanding of turning debt into equity (an asset) is that debt gets repaid over (usually) a long time OR it (the asset) gets instantly repriced by default on the debt.

    Ok… so delinquency is deleveraging.

    Carry on.

    Note to self: “stop looking at the Japanese real estate chart”.

  13. Concerns me, too. We’re adding debits along with assets, and the only way that makes sense is if you assume the debits can be carried forever, right?
    In the present system, we can only ‘rent’ our money.
    When gold was money, we were always coming up with new supplies (the new World, Australia, the Yukon, betting mining techniques, etc.) so we were constantly putting something real into the system. Not advocating that, but wouldn’t it be better to just print money to keep up with capacity and/or production rather than rent it.

  14. Not who but what, the what would be an App on a smart phone. Every good and service in the supply chain would be tracked by govt super computers. Then depending on the economic activity at any given moment in time, the final price paid would be an aggregate calculation and the price paid would reflect the amount of spending capacity assets in the system.
    All done in the blink of an eye and a tap on a screen..