DELEVERAGING IN REAL-TIME
The Fed published yesterday its monthly consumer credit report for May 2010. Total consumer credit outstanding fell by $9.1 billion in the month, after a drop in the previous month of $14.9 billion, revised from a previously estimated gain of $1.0 billion (we are awaiting the next Fed paper entitled “Counting is Hard. Don’t Let Bloggers Tell You Otherwise.”) The total drawdown from the peak in 2008 has been roughly $167 billion, a drop of 6.5% from a high of $2.58 trillion.
Consumer credit is made up of two components: revolving and non-revolving. Revolving credit consists of credit cards and other unsecured lines of credit that can fluctuate up or down from month to month. Non-revolving credit is made up of loans used to purchase automobiles, durable goods, and other personal expenditures that get paid down in more or less a straight line. The Fed’s consumer credit data exclude mortgage debt (loans, home equity lines of credit, etc). As the graph below shows, the bulk of consumer deleveraging has thus far been shouldered by revolving credit.
(Total Consumer Credit Outstanding)
It makes sense that in times of stress, consumers would first choose to pay down higher interest borrowing such as credit cards, but in practice this is a unique event. The relatively short history of unsecured revolving consumer credit is an interesting one, with growth from $0 to nearly $1 trillion in roughly 40 years, a 17.5% annualized growth rate. It’s no wonder there is such durable faith in the ability of the American consumer to spend. However, last year marked the first year-over-year decline in this data series.
(Consumer Credit Outstanding YoY% Change)
The mid-to-late 1990s saw impressive growth in consumer non-mortgage credit, as you can see in the first chart. This growth was not only in absolute dollars, but more importantly in terms of the income that must go to service that debt. The chart below looks at total consumer credit outstanding as a percentage of personal disposable income: the non-mortgage debt-to-income (DTI) ratio.
(Consumer Credit To Disposable Income)
Who is to say what the “correct” consumer DTI ratio should be? It’s rational to think that lower interest rates equate to a higher DTI, because the same level of debt service can fund higher levels of leverage, and interest rates have been falling steadily since the early 1980s. However, a reversion to a DTI of 0.20 would point to a further drop in consumer credit of about $165 billion (i.e. holding income constant, we’re about halfway through the deleveraging). Again, who knows if a 0.20 ratio is the sweet spot. Holding disposable personal income where it stands today, each 0.02 drop in the ratio equates to another $225 billion decline in consumer credit outstanding. Growing incomes would be a far less painful way to deleverage.
This is a great piece. It clearly shows that the consumer is far from the end of the paying down debts. The consumer is roughly 50% of the economy (depending on who you ask) so I think it’s safe to say that we can’t sustain a healthy recovery for quite some time. Unless of course, we releverage, which would just get us nowhere but worse off.
Considering that incomes have been falling (and increasingly made up of transfer payments rather than wages), the work households have done on their balance sheets is nothing short of amazing – and represents real hardship. So the powers that be thought that perhaps they should cut transfer payments, knock out SS and medicaid/medicare for the future, and impose some austerity measures? Capture by the moneyed interests is complete.
My parents were children during the Great Depression. They were debt averse all their lives, and drove it into their children. I’ll place my bet that a debt inspired economy is 1 1/2 to 2 generations into the future.
Growing incomes would be a far less painful way to deleverage. Annaly Capital:
Or we could acknowledge that a system that has driven 1 in 4 homeowners into owing more than their homes are worth is UNJUST. In that case, a more direct solution could be applied, a distribution of new legal tender fiat to EVERY US adult followed by genuine reform.
Or we can risk spiraling down into a deeper depression. The Keynesians are seen as having failed and the Austrian solution is deflation, liquidation, austerity and unemployment. How about a third option called justice?
Jerusalem could have been spared destruction by the Babylonians if it had not reneged on a pledge to free its Hebrew (presumably debt) slaves. Jeremiah 34:8-32
“The relatively short history of unsecured revolving consumer credit is an interesting one, with growth from $0 to nearly $1 trillion in roughly 40 years, a 17.5% annualized growth rate. It’s no wonder there is such durable faith in the ability of the American consumer to spend. However, last year marked the first year-over-year decline in this data series.”
“in roughly 40 years” That is amazing.
Instead of sending young students new credit card it may be time to teach them that this plastic transform’s in to the most expensive king of loan.
Deleveraging is basically paying for yesterday’s tomorrows plus 18% interest.
It boasted the economy but inevitably tomorrow is now and to day’s income is paying yesterday’s purchases. This kind of revolving credit only distorts and pushes forward the actual present purchasing power of consumers in the economy.
Credit Cards should perhaps be called Loan Cards and Debit Cards could be called Cash Cards. The brain does react to words.
But of course Banks do know that and there job is to make money from credit addiction.
Now its build your credit score time but as soon as the economy will come back they will start sending millions of new, nice and fancy looking card to every one.
I say: Use it only for traveling or emergencies.
Pay cash = Pay once. Use debit Card or Cash Cards. It’s better to be broke then being in debt and if you get in trouble take a real loan, you get a much better rate than plastic card and you will not be tempted to increase it like you could with a card and there eternal minimum payements.
It boasted the economy but inevitably tomorrow is now and to day’s income is paying yesterday’s purchases. This kind of revolving credit only distorts and pushes forward the actual present purchasing power of consumers in the economy. first
Which raises an interesting question: Why should an economy slow down just because people are in debt? It seems very silly that an economy should be so dependent on mere book keeping entries. I can understand how an energy or food shortage would depress an economy but its beyond ridiculous that a shortage of fiat money can cause a world-wide depression.
“Why should an economy slow down just because people are in debt?
Because it’s paying time”.
Money can only be a claim on goods.You have to pay with some thing of value other wise your are simply not paying. This would have no end and lead to Zimbabwenomics.
Because it’s paying time”. first
So people should be unemployed because it is “paying time”? What sense does that make? Answer: None.
F. Beard.
Unemployement is not a problem it is a sad consequence of over production from a gigantic credit bumbles. It’s just like fever is normal consequebce of a healt problem. You can keep it down a bit but you don’t cure the fever you have to cure the problem.
Controlling employment is just as impossible as controlling demand. It’s been tried several times and it always fails. The stimulous plan will go down in history as one more example.
Like ice cubes to a feverish person, yes we need to be charitable and have good safety nets for the victims of this mess but to fix the cause. Stop the central planers of money and interest rates. Markets and cental planing is an contradiction.
Get the Fed and big brother out of the way and things will get back to normal very fast.
Even Banking would have to play by the market rules.
Why is apple computer doing so well?
Are they in a over regulated environment?
Do they benefit from special privilege?
Is there a Government agency watching over there shoulders?
Did they get there because they are a protected monopoly contributing millions to politians ?
None of the above. They are in this position because they offer exelent,inovative and quality product at a competive price.
Those are real jobs.
Employment is meaningless if the steel that comes out of the plant goes right back to be melted again by a new shift of night workers. You may as well send them funny money to stay home it will save energy.
You may as well send them funny money to stay home it will save energy. first
It wouldn’t be funny money; it would be just compensation for an inherently unjust money and banking system, ie. government backed fractional reserve lending in a government enforced monopoly money supply.
The Austrians are fully aware of how unjust our system is yet accept deflation as a painful necessity to fix it. So they accept one injustice to fix another. Where is their concern for innocent bystanders?!
I advocate for fundamental liberty in money creation so I propose eliminating the causes for our problem too. Meanwhile, many Austrians would be content with a new government backed Gold Standard.
“new government backed Gold Standard”
I agree with you on that point Gold can not be not be money in a modern economy.
Consumer Credit/disposable income. That charts a helluva storyteller. Wow! Great work Annaly Capital. Overlay that chart on Prime Rate (how far back does that go?) and I think you’ll have a candidate for chart of the year
Great piece. Consumer is grinding it out. Cleaning up the house after the toga. Still haven’t hit the backyard, the pool, and the basement though. Gotta ways to go.
I think the most important part of this piece is the following sentence:
“We are halfway through the deleveraging”
ABSOLUTELY. And the Fed is making some GOOD moves, low interest rates do screw savers, but the refi boom has put a lot of capital back in the pockets of consumers. Including mine.
Market is looking solid and a screaming buy in the 900s, imho.
I think that this deleveraging process is just a reversion to the mean after a period of excess, and disagree vehemently with the doomsayers about the likelihood of a Great Depression 2.
Quick story. I’ve racked up about 10,000 in credit card debt on 100k in liquid assets, but an income that’s dropped by 35% due to bad sales in the last 2 yrs. I’ve been cashflow negative for about 6 months and am in a high rent apt. I’m 30 years old and am about to go move in with my parents after 12 years of living out on my own.
The concept of being independent etc is going out the window because the economic reality is that I need to cut costs. I think that top down economic forecasts of consumer behavior ignore the many wily means by which people will adapt, and those adaptation will lead to a better allocation of resources.
For instance, what is the social utility of 10 people each having their own living dwelling? Does each person really need their own TV, internet connection, washer/drier, oven, refrigerator, etc? If those 10 people shared one roof and resources, couldn’t they get economies of scale? The money not spent on duplicate resources could be saved/invested in something that will generate a higher social ROI.
“Or we could acknowledge that a system that has driven 1 in 4 homeowners into owing more than their homes are worth is UNJUST. In that case, a more direct solution could be applied, a distribution of new legal tender fiat to EVERY US adult followed by genuine reform.
Or we can risk spiraling down into a deeper depression. The Keynesians are seen as having failed and the Austrian solution is deflation, liquidation, austerity and unemployment. How about a third option called justice?”
Are you sure the Austrian solution isnt the just one!?
The so called home owners now in negative equity were quite happy to ride the euphoric wave of higher house prices. It seems you are complaining more about their lack of education and fincancial savvy.
In my mind deflation and austerity are the morally and just ways out. Why kick the can into the future with more debt and leverage, or morally hazardous bailouts? Better to get it out and deal with it now. Short sharp shock and off we go. Currently future generations are being saddled with debt because the current selfish generation cant be bothered doing any work and want to borrow from the future to live the high life today.
In my mind deflation and austerity are the morally and just ways out. Why kick the can into the future with more debt and leverage, or morally hazardous bailouts? Better to get it out and deal with it now. Blobby
Deflation is just the flip side of the bankers’ money-for-debt paradigm. Credit money is created from nothing as it is lent (inflation) and goes back to nothing as it is repaid (deflation). Essentially, bankers issue credit in other peoples goods and services. Think about that. What moral right does a bank have to issue credit for someone else’s labor or goods?! It doesn’t yet legal tender laws and other government privileges for FRNs leave people with no practical alternatives.
There are ways to do money that do not even require borrowing and lending. Tally sticks, for instance, were used for hundreds of years in Europe with great success. They were basically receipts for goods received or labor performed that were issued and accepted back as money by the issuing party. Common stock is another potential money alternative that would share wealth at the same time it purchases it.
Speaking of morality:
“You shall not charge interest to your countrymen: interest on money, food, or anything that may be loaned at interest. You may charge interest to a foreigner, but to your countrymen you shall not charge interest, so that the LORD your God may bless you in all that you undertake in the land which you are about to enter to possess.” Deuteronomy 23:19-21 (New American Standard Bible)
While I accept your right to hold outdated views and beliefs there is no point quoting irrelevant fairy tales to support your case. They mean nothing to me.
The morality of extending credit is the same as the morality as that of accepting it. You are still trying to shift blame from the ignorant and greedy. Are you sure your religion hasnt altered your perception of reality!?
You are still trying to shift blame from the ignorant and greedy. Are you sure your religion hasnt altered your perception of reality!? Blobby
I simply followed the moral implications of government backed fractional reserve banking in a government enforced monopoly money supply. It is the literal source of the “rat race”.