Despite lopsided balance sheets and near record levels of household debt the Fed appears to have succeeded in convincing American households that it is wise to begin re-leveraging.  The Fed’s latest consumer credit report showed broad improvement in consumer credit trends (via Econoday):

“Revolving credit failed to post a second month of improvement, contracting $4.2 billion in January following December’s $2.0 billion gain. Non-revolving credit, boosted by strong vehicle sales, surged $9.3 billion in January following December’s $2.1 billion gain. December remains the only month that both revolving and non-revolving credit have expanded this recovery.

On a total basis, consumer credit rose a rounded $5.0 billion in January vs December’s $4.1 billion (revised down from $6.1 billion). Annually, total consumer credit is up 2.5 percent with non-revolving credit up 6.9 percent and revolving down 6.4 percent, again the latter a disappointment following December’s annual percent gain of 3.0 percent.”

As I’ve previously mentioned, this is great news for the near-term economic outlook.  A re-leveraging consumer means  more spending, higher corporate revenues, etc.  My hope was that a 10% deficit would result in consumers continuing to de-leverage, however, that looks like wishful thinking.  Instead, the combination of easy money and no loser capitalism appears to be setting the foundation for another debt binge.  At a level of 115% of debt:income this trend is clearly unsustainable, however, the American public appears intent on sustaining its fiscal imprudence.  In short, enjoy the growth, however, once the deficit shrinks or another asset bubble pops the air is going to come out of the debt bubble once again and the upside down US consumer will again be exposed as the imprudent consumer that he/she is….


Got a comment or question about this post? Feel free to use the Ask Cullen section, leave a comment in the forum or send me a message on Twitter.

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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  • Southerner

    “We change when the pain to change is less than the pain to remain as we are.” – Ed Foreman

    Unfortunately…it looks like it will take a lot more financial pain before we Americans see a long term change in our financial behavior.

  • cswake

    If this is the direction we’re heading in, let’s go all in. I propose federally-funded, weekly circuses in every American city… and bread. (Read: ipods, laptops, homes, healthcare, education)


    Roller coasters would be nice too! (Cedar Point is a good model)

  • wh10

    Cullen, what level of consumer leverage is desirable?

    Also, I can see how the Fed’s policy of the “wealth effect” encourages further leverage, but per the discussion with Scott F regarding fiscal/monetary policy and deleveraging/releveraging, I wonder what would drive consumers, *in the long run*, to delever even after an MMT-level fiscal stimulus plan. It seems you need something beyond just fiscal or monetary policy (e.g. regulation, cultural paradigm shifts, etc). It’s hard to say how much the Fed’s current policy is contributing to this releveraging, but it seems there is much more to it than a Fed that doesn’t pull the punch bowl.

  • AWF
  • ES

    > As I’ve previously mentioned, this is great news for the near-term economic outlook. A re-leveraging consumer means more spending, higher corporate revenues, etc.

    Does it mean more inflation thenas well as the bank reserves are being put to work?

  • http://www.pragcap.com Cullen Roche

    The historical rate is closer to 65%, but sustainable would assume to be even in the 90% range. Not healthy, but sustainable assuming it stays there….We have much deleveraging to be done.

  • wh10


  • http://www.pragcap.com Cullen Roche

    perhaps a bit….

  • Quaresma

    you were bearish in September and market’s been up 20% since and now you turn bullish.. what a great ride!!

  • http://www.pragcap.com Cullen Roche

    These are always fun comments. No reader has any idea how I am ever positioned. But one thing that doesn’t change is my algo which spits out buys and sells. And as hundreds of readers can confirm I was not bearish in August and September….I’ve posted this a million times, but I can see there are still trolls out there trying to put words in my mouth. You’re embarrassingly wrong about how I’ve been positioned over the last few months and using my macro commentary to assume what my algo says is sheer stupidity….I’ve warned readers about reading into my macro outlook before:

    And some details for you. Again, trading off of my macro commentary is beyond stupid….

    I made it clear that I was not bearish on August 29th:

    “I was actually moderately bullish heading into 2010, but turned bearish in April when everyone was becoming very euphoric. I’ve been pretty negative since then, but sentiment readings are getting very very negative and I’ve been looking for a washout and a spot to go long. I use a proprietary algorithm that basically shows me the summation of several indicators compared to current market prices. In essence, it’s like a short-term version of my expectation ratio. It drives all of my near-term EQUITY decisions that are in what I refer to as my global macro portfolio.”

    I spent much of the next few weeks describing why QE was misguided and likely to do nothing for the real economy. After a huge rally I decided the move was overdone. So, on Oct 15th I wrote:

    “If my theories prove correct it is likely that the dollar is well oversold and equities have become overextended on false hopes of a Fed driven economic recovery. This means the market is excessively concerned about inflation and we are likely to move closer towards our economic reality of disinflation with a higher risk of deflation than high inflation. If this is correct it means there is a fairly sizable air pocket beneath risk assets currently.”

    What happened? The dollar bottomed the next day and has rallied over 5% since. As for the equity markets I was a bit more clear in comments when asked:

    “I think the next few weeks are characterized by a huge number of catalysts. Apple earnings (it has become the Nasdaq), election, FOMC & QE2, etc. Being this overbought here I view the market as being extraordinarily risky while ignoring several risks – a dollar rally if foreign central banks talk down their currencies, Euro’s rise leading to inflammation in sovereign debts, banks and mortgage mess, and the failure of QE2 to generate inflation.

    We could easily rally up to 1220….I will sell when my program tells me to sell. No psychology involved. It hasn’t given an official short signal (yet), but I expect one in the next two weeks and I plan on being ahead of the move while also adding.”

    “Would add into any move over 1200. Would LOVE to see 1220″

    “I leg into a position. I can’t give too many specifics, but I am willing to sustain quite a bit of upside here. If you leg into it on the way up you should view it like you’re dollar cost averaging. Position sizing and risk management are vital when shorting….But I am managing it accordingly. Fully prepared to see 1220 or higher on the S&P before a major reversal occurs….”

    So, in reality I bottomed ticked the dollar trade to the day and told readers to get short and leg into the equity short with the expectation that the S&P might rally into the May highs of 1220. What happened? We kissed the May high of 1220 and the markets all reversed. I actually couldn’t have possible gotten the trade any more right if I had tried.

  • Oz

    I read a couple of months ago that a big part of the stabilisation in debt levels was a result of the inclusion of things previously not included in this data.

    I can’t find the info right now, but from memory John Mauldin was discussing how the inclusion of student loans from late last year has distorted the data…

  • Rharaz

    Is the following article relevant to this post?


    The article states “Here’s the problem with this chart, which shows that non-revolving credit is indeed improving – it’s distorted heavily by one thing – student loans, all of which were transferred to the Federal Government… So let me see if I get this right – we’re trying to crank consumer credit by turning into debt slaves the only group of suckers left – our young adults. The rest of America has wised up and contrary to media reports is not increasing their credit load, revolving or otherwise.”

  • scharfy

    Revolving credit declined significantly in jan.

    The larger trend is people paying down revolving debt.

    This post is confusing.

    Latest numbers are january. Why are you looking at seasonally distorted Dec numbers?

  • http://www.pragcap.com Cullen Roche

    Sorry. I must have copied the wrong data. It is updated correctly. Conclusions are unchanged….

  • http://www.pragcap.com Cullen Roche

    That’s accurate, but isn’t the data including student loans more accurate anyhow? I see how one can be upset by the Fed changing the data, but the truth is consumers are taking on more debt….

  • Tennessee Homebuilder

    Another note from the trenches… Home sales in the past month have been the strongest in 4 years. Retirees jumping off the fence and definitely feel better since stock market up. Sold 8 new homes last year, and we’ve sold 6 this year in 2 months. Clearly a change in psychology with each customer decision after the new year, and 3 are starting to build without selling their existing home… seldom in 3 years we’ve seen this except in +$600k homes. We’ve lost 80% of builders here, so as the pie gets larger we see it quickly.

    All customers are retirees with money. No young people or families. No interest at all from young or families in 3 years.

    No delusions here though… stock market gets hit and I’m playing the survival game again. The Fed has temporarily achieved its goal of getting the citizens (cattle) with cash (or 401k’s) to feel better by underpinning the stock market.

    Cullen, do you think QE3 will be a benefit for the stock market (and my little world)? Or do you think wall street will wake up to its non-effects? I see Fed members preaching for QE3 now but so many already blame high oil on QE. I would think QE3 would empower the “Print money —> Higher Oil” fanfare. Why would FED folks be talking about QE3 now? Just as a primer to the stock market? Just as I begin to get a grasp…

    Thanks again for the MMT education and your site… still learning…

  • Zebra

    well said. for now more morphine (QE’s) seems to be more pleasant until amputation..

  • Rharaz

    But are the implications that the credit currently taken on by students is not sustainable (a bubble?), and that this metric may begin trending downward in the near future?

  • http://www.pragcap.com Cullen Roche

    Impossible to tell when a credit binge ends. One thing is for sure – those kids are graduating with a pile of debt only compounds the larger problem and many of them are graduating into a world with fewer jobs. On the whole, consumer credit is still totally upside down and needs to decline substantially. For now it looks like the consumer credit trend is on the rise again, but it remains unsustainable.

    On a similar note, I backed out the student loan portion. You can see it below. It shows consumer credit still on the decline.

  • http://www.pragcap.com Cullen Roche

    I still don’t think it’s accurate to say that we should back out this data though….Whether you like the fact that the govt is adding to the consumer credit data is entirely irrelevant. They’re doing it….

  • Rodger

    The percentage change from year ago is still negative. They are still de-leveraging, but at a very small rate.

  • Brandon Ferro

    Bernanke is absolutely killing it in every way – 2011 Time Man of the Year??

  • alex

    Um… Since this is a percentage change graph, the uptick at the end doesn’t mean that consumers are re-leveraging. The graph shows that in fact they are still de-leveraging, but at a smaller rate.

  • Mark

    QE 3 baby! QE 3 all the way!

    Let’s get it rolling!

  • alex

    TH – “All customers are retirees with money. No young people or families. No interest at all from young or families in 3 years”.

    It’s always good to hear first hand stories rather than just statistics and analyst reports! Thanks for your excellent comment.

    What you just said got me thinking about the long term housing market , and now I am convinced home prices may not fully rebound for years. Depending on high equity prices to keep demand and prices high is not a great idea. If an equity bubble were to develop and pop 5 years down the road, housing prices would fall right back to where they are now. What needs to happen for a resurgence in house prices is a revived and de-leveraged Main Street (and is this going to happen anytime soon?). Not only that, but the long term demographics are not on home prices side. As the number of people over 65 increases, more people will move into retirement facilities, which will keep the supply of homes high. (there are also many other goods reasons that I have missed out)

  • alex

    Ben Bernanke – 2011 Time Man of the Year? No. Even worse, this years award will go to one of the Republican leaders, for reducing the deficit, being economically responsible ( lol) and helping to avoid the bankruptcy of the USA! :)

  • quark

    Consumer debt did not peak until 7-31-2008. Consumers debt will increase in the face of financial calamity before anyone realizes they have taken on to much credit…it is the nature of the beast. I wouldn’t hang my hat on economic growth being sustained because consumer credit is expanding toward the old high.

    2007-08-31 2478.4
    2007-09-30 2490.8
    2007-10-31 2501.3
    2007-11-30 2515.4
    2007-12-31 2522.2
    2008-01-31 2530.3
    2008-02-29 2540.8
    2008-03-31 2553.4
    2008-04-30 2566.7
    2008-05-31 2566.9
    2008-06-30 2576.2
    2008-07-31 2581.9
    2011-01-31 2412.3

  • quark

    As you said Cullen…this is short term and unfortunately it just makes the ultimate outcome worse.

  • Tom Hickey

    Instead, the combination of easy money and no loser capitalism appears to be setting the foundation for another debt binge.  At a level of 115% of debt:income this trend is clearly unsustainable, however, the American public appears intent on sustaining its fiscal imprudence.  In short, enjoy the growth, however, once the deficit shrinks or another asset bubble pops the air is going to come out of the debt bubble once again and the upside down US consumer will again be exposed as the imprudent consumer that he/she is….

    The definition of insanity is doing the same thing over and over and expecting different results.

    Mark Thoma opines that next time the outcome will be different because of the politics (Politics Matters). If this is correct, it may be that politically the government will not be able to stop the implosion with another rescue. The result would be depression.

  • Librarian

    The student loan issue is quite troubling. This is because many people (most of them young) don’t realize that student loans are the debts from hell. You can’t go bankrupt on them. You can go bankrupt on on Visa and MasterCard. You can turn your car back to the lender and file bankruptcy on the deficiency balance. These young people taking on student loans have no idea what they are getting themselves into. When you take on a student loan, you’re stuck with it. 1.5 million people filed for bankruptcy last year. A very tiny amount might have gotten out of their student loan debts under extreme circumstances. Forget about the moral issue as it pertains to debts. You can’t deleverage student loan debts unless you pay them off or flat out default. Unless you pay them off, they’re not going away. This is going to be a disaster.

  • Tennessee Homebuilder

    No graphs, % changes, logrithms… just hard core #’s. Wow much too scary. Can you put it back in a pretty graph format? I need to sell homes for another 20 years but apparently I need to shift my focus to selling used Ipads. High utility/low cost businesses that don’t require loans.

    So after 2 1/2 years of what we small business folks consider a Miserable Depression, this is the consumer debt reduction we have to show for it? Wew! I can’t see banks loaning too many consumers $’s for homes in the next 5-10 years. And now they might be expected to put down 20%. I was hoping Martin Armstrong was exagerating when he said Real Estate was dead until 2025…but at least he put it in an attractive pencil graph from jail!

    Just joking around Quark… thanks for the #’s. I think I’ll go to bed now and dream up ways to sell homes to rich people…

  • JNH

    Don’t be fooled re leveraging can mean other things too like, paying for food, utilities,gas, mortgage with credit because there is no cash or income. When Ben B said higher oil prices would not effect inflation, I thought what a load of crap, but now I realize its true, why, with so many unemployed people demand for gas is still sub-par, of course it will go up but I don’t think it will be like five years ago.
    Any major increases will only lead to less consumption and then market will find its pricing equilibrium. But then again with the Fed no one knows where the smoke is coming from.

  • Mike M

    Good post. What do you think of the NY Fed’s chart on total debt? It seems that including mortgages, there is still a decline for the last several quarters. Perhaps deleveraging is still happening, just different types of loans?


  • http://www.pragcap.com Cullen Roche

    If you look at the details of today’s report there is still broad deleveraging in most loan types, but it’s slowing and/or growing in other cases now….

  • Knight


    Do you have an RSS feed that will send me an email with a list of your post. I cant seem to find it anywhere on your website.


  • http://www.pragcap.com Cullen Roche

    Check the right side of the site. There’s a subscribe section.

  • HH

    Regarding student loans. When I was at university we had 2 years of national service waiting for us when we left and hence there was a strong incentive to extend our education in the hope that conscription would come to an end in the interim. If job prospects are poor on leaving university this would provide a similar incentive to extend your education in the hope that the economy recovers by the time you eventually leave.

  • JH

    This will end badly. Debt levels at present are not sustainable. With problems in oil markets, a continual drop in middle class wages, European sovereign debt defaults, government budget cuts, and the beginnings of a double dip in real estate, there is little doubt that more debt default in the private sector is inevitable.
    The people of the US have a short attention span and little tolerance for pain or austerity. As we have seen in the past, their desire for a materialistic lifestyle over rules their common sense, and long term outlook.
    It is just a matter of time before we see another economic collapse that will eclipse 2008.

  • Ilya

    I am a bear by nature. Cannot understand unsustainable lifestyle and policy choices currently embraced by all developed countries. However, if credit continues to expand there will be a spectacular rise before this thing vomits all over itself. I hope I have the balls to join the ride. I am watching credit in disbelief, but watching it closely.

  • Locathah

    ” once the deficit shrinks or another asset bubble pops the air is going to come out of the debt bubble once again and the upside down US consumer will again be exposed as the imprudent consumer that he/she is….”

    You say that like it’s a bad thing. In today’s government-run prison-state economy, the surest way to succeed is to be exposed as an imprudent consumer…at which point you can cry the blues to your friendly neighborhood congressman and watch a whole bunch of programs pop up to make sure that the prudent, responsible dummies in the rest of the economy pay your bills for you while you enjoy the goodies that you imprudently consumed.

  • Southerner


    With the sell of new homes likely to be low for some time…would it be a market for someone in your area with your skills to look into building fewer spec houses and “paying the bills” with home repairs?

  • Ashpelham

    The thing about these student loans that frightens me the most is the inability to repay them. Let me be more specific: a lot of money is being lent to students of the new for-profit colleges. Often times, the tuition at this “institutions” is higher than at a state college. And most often, the credits are not transferrable anywhere else, the degree won’t be recognized, and the training might not be up to standard. We are seeing profit-making businesses being discussed as education, and being paid for by people who can’t afford to pay now, and might not be able to when they’ve obtained their certification, because the demand for the degree isn’t there. And all of the money being lent is lent by UNCLE SAM, not private lenders who no longer offer student loans at all!!!! Recipe for disaster? I think so…..

  • MamMoTh

    Which just confirms that you get growth when the rate of change of the rate of change of credit is positive (that is the 2nd derivative).

  • rhp


    Re student loans. Gov’t loans cover but a small fraction of the total student loan pool. Maybe 20%. The rest still IS being lent by private institutions but they are the big boys, not the small town banks. Just google “student loan direct, slma” and see what you come up with! Financial institutions are still setting up shop on campus and offering loans in the form of a DEBIT CARD for those financially sophisticated 18 y.o’s. (Source: Personal friend at a lender/servicer).

    My father was appointed to SLMA as an original board member by Nixon back in the 70’s. His compensation was $500 a year. Compensation is currently around $250K plus stock options and Mr. Lord’s personal jets and golf course are well described. The transfer of wealth from student to Wall Street has been simply astounding. Recipe for disaster?? Most certainly. And deleveraging of student debt is highly unlikely unless the laws are changed……..

  • AWF
  • JNH

    I have to agree with you as much as I want this to turn around, there are just to many things that just can’t be resolved, the hole is just too deep. It just feels like we are on the precipice of something catastrophic. With all this hype people may start to “stick their neck out”, just to get it lobbed off.