The household balance sheet remains the primary concern with regards to the economic recovery.  The latest data from the Federal Reserve on consumer credit showed the first expansion in credit in 12 months.  While many view this as a positive I remain skeptical of the sustainability of the recovery.  Total consumer credit expanded to $2.46T in January.  Unfortunately, this is exactly what the consumer shouldn’t be doing right now and substantially increases the risk of a stimulus withdrawal resulting in a double dip in 2011 or 2012.  At the same time we are beginning to see signs of life in consumer sales – another potentially negative omen for the wobbly recovery.  While all of this might appear to be a positive at first glance it substantially increases the risk of a double dip.  Allow me to elaborate.

Fitch recently reported that the charge-off rate for prime credit cards remains at its highs:

Fitch Ratings-New York-03 March 2010: U.S. credit card charge-offs surged to near record levels set last fall, according to the latest Credit Card Index results from Fitch Ratings.

Fitch’s prime credit card charge-off index jumped 112 basis points (11%) to 11.37%. The results, which cover the January collection period, pushed the index to its highest level since September 2009’s record 11.52% and 54% above year earlier levels. The increase was largely driven by a payment holiday for Chase credit cardholders, which pushed more charge-offs into the current period .

This highlights the continuing debt woes in the private sector (specifically consumers).  As we’ve long maintained, it is this perpetual expansion in consumer debt which not only caused the credit crisis, but could ultimately result in its nasty revival.  As Fitch notes, these trends are likely to continue barring some miracle return in jobs growth:

“Late-stage delinquencies are still trending in the 4% range industrywide, which is keeping chargeoff levels in the double-digits,’ said Managing Director Michael Dean. ‘Until we see some meaningful improvement for employment numbers, consumer delinquencies and defaults will remain elevated at or near these levels.”

Remember, we’ve lost over 7 million jobs during this recession.  If the jobs recovery were similar to the 2003 employment recovery it would take until 2016 to get back to the pre-credit crisis employment levels.

What’s so interesting in all of this is the potential for a consumer led double dip in 2011 or 2012 if the government steps aside and the stimulus programs end.  As the following chart shows, you can easily see that American households have simply spent more than they earn over the last 6 years.  Ignore every single one of those parabolic (fear mongering) debt charts you have seen all over the internet and in research reports that attempt to show how scary the U.S. government’s mounting debt woes are (remember, as the sovereign issuer of the currency, THE UNITED STATES CANNOT DEFAULT ON ITS OBLIGATIONS! – see here & an explanation of the continuing deflation threat here).   But households certainly can default and do so every day.

What’s crystal clear over the preceding 12 months is that the government stimulus has attributed for the majority of the economic rebound.  The hope, of course, is that the public sector will soon hand over the baton to the private sector.  I fear that is not a transition that can occur just yet.  According to my calculations the $1.4T gap between what households earn and household liabilities will continue to be a strain on households for approximately TWO more years.  This assumes no major structural changes in the economy or the housing market (which I actually expect to further weaken barring even more stimulus).  Households need to continue de-leveraging in order to repair their balance sheet back to a time when their incomes are in-line with what they spend.

Of course, a continuing culprit in all of this is the banks.  This industry which takes much and produces little, continues to hurt the potential economic recovery with their debt based revenue model.  This is not to imply that the U.S. consumer played no role in taking out more debt than they should have, but the lack of regulation in the banking industry substantially contributed to the gross amount of debt that consumers (and banks) have been allowed to take on (no doc, no down loans come to mind here).  The United States government absolutely must pass harsh regulation on these banks and prohibit them from ever being able to fool the consumer into taking on so much debt (or leveraging up their own balance sheets with reckless products).  At the same time, U.S. consumers must wise up, continue to fix their balance sheets and make prudent and educated financial decisions.

The latest data from the Fed on consumer credit shows that the days of saving and financial prudence may have been short-lived.  If the consumer continues to take on more debt than their income we will continue to see a very weak economic recovery.  And if the government attempts to pass on the baton by falsely assuming that the consumer can run with it, then we are at very serious risk of a double dip in 2011 or 2012.


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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  • Reinhard

    “as the sovereign issuer of the currency, THE UNITED STATES CANNOT DEFAULT ON ITS OBLIGATIONS!”

    Sorry, but that appears to be the typical Ivory Tower Economist analysis. Why did then so many other countries which had also issued debt exclusively in their own currency default ? Simple, because at some stage nobody wants to buy the paper anymore. Of course the US can make a Zimbabwe but that imo is just another name for default.

  • ES

    It is unconscionable really all this cheerleading from the media and public officials, telling us things are getting better and getting people to spend. We already know consumers don’t have a strong will, people love to spend, and the problem is they cannot afford it. For a while people were scared into prudence but now after a year of prudence they are tired of it and they want to spend. But they shouldn’t. At the very list our public officials and media shouldn’t be cheering them on of the cliff.

  • http://declineandfallofwesterncivilization.blogspot.com/ gaius marius

    just the opposite, imo. countries without a commodity-linked currency which have defaulted either politically chosen to do so or borrowed in a foreign currency which they could not obtain. that’s just a fact.

    the answer to “who will buy it” is “the fed”. loans create the vast bulk of money, not reserves; there’s no inflation risk thereby short of input scarcity. domestic inflation risk. could the dollar weaken? surely. but breaking dollar pegs and allowing the dollar to weaken to the point where the US can be a net exporter is a good thing in the long run. (though also a difficult intermediate-run standard of living adjustment — not the least means of which would be very expensive and increasingly scarce oil — but that adjustment is coming either way).

  • percolator

    I would say it was more of a failure of the regulators than it was a lack of regulation, though CDS definitely need to be traded on a regulated exchange.

  • http://declineandfallofwesterncivilization.blogspot.com/ gaius marius

    TPC —

    i’d be further interested to see the annual series of the aggregate of household income and the *change* in household liabilities. that’s really (from a stock-flow perspective) a measure of how the spending capacity of households has changed in recent years.

    in other words, it’s clear that households saw their purchasing capacity spike as the first derivative of that liability curve went to the moon — and now that the slope is negative, the change in debt is actually removing spending power. that’s a *huge* change, and it’s also how debt-deflation becomes truly disastrous as the contraction of debt destroys asset prices and reduces incomes, increasing the imperative for balance sheet repair while ensuring it is even more difficult to effect.

  • Dapperdave

    Excellent post, and outstanding site. Just discovered PragCap a few weeks ago and it has quickly become my go-to financial blog of choice. Balanced, thoughtful analysis is so hard to find these days – don’t change a thing.

  • http://declineandfallofwesterncivilization.blogspot.com/ gaius marius

    lol — i apologize for my very poor self-editing as i post between other things!

  • chris

    “What’s crystal clear over the preceding 12 months is that the government stimulus has attributed for the majority of the economic rebound.”

    another unsupported assertion. in any event, we are not even half-way through spending the stimulus, so all of your warnings of a difficult second half of 2010 because the stimulus spending will have been withdrawn needs some further thought: http://projects.propublica.org/stimulus-speed-chart/

  • http://www.pragcap.com TPC

    Apples and oranges. The US government never “doesn’t have funding”. Greece is not the sovereign issuer of their currency. They can’t print. Zimbabwe was a corrupt mess with 80% unemployment. The Weimar Republic was also the same, not to mention, tied to the gold standard.

    It is VITALLY important to understand this. We could effectively bankrupt ourselves by spending so much that we create horrid inflation, but that is not the case. In fact, there is NO inflation. Why? Because there is still too much productivity and too little aggregate demand chasing all that productivity (in a nut shell).

    The United States is NOT Zimbabwe. The comparisons are actually ridiculous. As for Argentina and Russia, they pegged their currencies to the dollar – again, not the currency situation in the US. We are a sovereign floating exchange.

  • http://www.pragcap.com TPC


  • http://www.pragcap.com TPC

    Is there any other solution? You imply that the recovery has come from the strength in the private sector. There is no evidence of that. You’re fooling yourself if you don’t think this turnaround has been government driven.

  • AWF

    The Question:

    Why have we seen this Uptick in Consumer Spending ?

    At The Woodlands Mall (Weakend 03/07/10) the consumer traffic was brisk– I would say as good as Christmas.

    Searching for reasons why i came to these conculsions.

    Consimer more confident now that the BO Train has been slowed/stopped.

    Consumers have paid down a litle CC debt to use it again.

    No more Sports on TV–Nothing to do but Shop?

    Plenty of merchandize on Sale–30-50% reductions in price.

    The Restaurants were even having sales.

    Enticing the Consumer with lower prices always works.

  • chris

    we are just beginning the economic recovery. it is a couple of quarters old and it is accelerating. it is accelerating because people are starting to be hired rather than fired, and the exhaustion of inventory has to be replaced.

    the stimulus helped out early last year but its effects going forward will be de minimus in view of the size of the US economy, primarily because it is being spent so slowly. look at the link on my last post.

    credit expansion is occurring in the household and will soon occur among corporate borrowers, which will enhance the recovery. i know you would prefer a massive debt paydown and the concomitant asset deflation, but other than the burst of the housing bubble (no small matter) that has not happened and will likely not happen. who is fooling who?

  • http://www.pragcap.com TPC

    Much of it is due to government support. Ironically, however, the consumer needs to continue de-leveraging and get its balance sheet right side up. Otherwise, we will have gotten ourselves nowhere. Add in the weak banking sector and what have we really accomplished? We’ve effectively kicked the can down the road. That’s all.

    Once the stimulus ends, the economies true colors will show again (assuming these trends continue). If housing declines from here and further debilitates the banks and consumers then things could get ugly again.

  • http://www.pragcap.com TPC

    economy’s….the old brain isn’t working quite as smoothly as I’d like. Might have to grease it with another cup of coffee.

  • http://declineandfallofwesterncivilization.blogspot.com/ gaius marius

    read ed harrison and tim duy until you are convinced. the stimulus has been most of the recovery, assisted by a large inventory correction cycle. both are now rolling off.

    how much stimulus is left, BTW, is almost meaningless. consider: let’s say i design a stimulus that pushes out 10% of the spending in one month, and the remaining 90% in equal portions over the next 900 months. where is the peak benefit of the stimulus? clearly in month one. month two actually sees a massive contraction in aggregate incomes and spending as stimulus rolls off. by month 3, we have 89.9% of our package left to spend — and it will be of near-zero impact on GDP, incomes, etc. until it finally and quietly dies out.

    our current stimulus was exactly so designed. most of it is left to spend, but will be stretched into 2013 with diminishing outlays. the flow peak was 4q09. going forward, the falloff in the rate of stimulus spending will actually be a negative for GDP and incomes. the hope was the jolt would revive the private sector credit expansion. it hasn’t. that’s a major problem.

  • http://www.pragcap.com TPC

    I’ll look into that. Did you see Galbraith’s piece this weekend in the Nation? It’s in my weekend reading section. VERY good stuff. Sound judgment.

  • http://www.pragcap.com TPC
  • http://www.pragcap.com TPC

    A few things:

    1) I am not cheering for the return of asset deflation. No one benefits in that environment. If I could return to the good old days of the 90’s or 2003-2007 then I would be delighted. But I am trying to be realistic and focus on what could still hurt this recovery.

    2) I honestly believe it is your style of thinking that most threatens the recovery. The mass deficit fear mongering and thinking that we are now out of the woods is exactly what we shouldn’t be thinking now. The truth is, the private sector is still VERY weak and cannot run with the baton. The graph in the article clearly shows why this is so. Our balance sheets are still under water. It’s that simple. Americans might be spending more, but that is not sustainable. Not until their income come back in-line with their liabilities.

  • http://www.pragcap.com TPC

    Nice comment Gaius.

  • percolator

    Denninger said Galbraith’s article was “intellectually-bankrupt and fallacious”:


  • http://www.pragcap.com TPC

    That article you linked to is full of misrepresentations and a total lack of understanding of how a floating exchange currency system works. His use of the Weimar republic to back his thinking is horribly flawed. This is the classic example used by most people who want to take us back onto a gold standard or convertible currency.

    Is Denninger a gold standard advocate by any chance?

    His comments on the sustainability of the recovery is exactly the point of my article. The consumer is in no place to run with the baton yet. And my consistent comments on the banks is a large reason why we have become less productive. We have become convinced that our credit cards are good and that working at a big bank is the best job in America.

  • http://declineandfallofwesterncivilization.blogspot.com/ gaius marius

    it is possible that we’d see a renewed private sector debt expansion, to be sure.

    but i think one has to look at the changes in bank balance sheets and the increase in investment portfolios (read: treasury holdings) to see that loan demand has turned net negative. forget the income statement; the aggregate private balance sheet simply won’t support existing debt anymore, much less new debt, after/during the collapse in assets, unless we go back to NINJA neg-am loans.

    the big banks have been saying for months that they would be cutting their consumer loan book — JPM presented at CLSA in 2009 saying they’d be cutting their book by 2/3 in three to five years, and that’s about standard IMO. with the means of providing consumer finance such as it existed in 2005 — the securitization market with off-balance sheet special purpose vehicles funded by CP buying up issuance — completely gone and not to return, it could hardly be any other way. even if they could find loads of willing borrowers, the infrastructure for the kind of finance then available just doesn’t exist anymore — and won’t again for a long time, being a collapsed ponzi.

    i do agree that there exists room for a capital investment-led recovery — but with excess capacity so significant that just isn’t base case thinking IMO unless the US gets cut off from imports via a dollar collapse (necessitating a buildout of domestic production).

  • http://declineandfallofwesterncivilization.blogspot.com/ gaius marius

    denninger is more invested in sensationalism than sound analysis. imho. i read, but i often discount heavily.

  • http://www.pragcap.com TPC

    I don’t get to read his stuff much. There are certain blogs out there that simply push this gold standard hogwash in people’s faces because it is easy to understand and makes sense to us as households who are spending constrained. In fact, the very largest of the financial blogs consistently push this misguided agenda and it significantly contributes to the ignorance of the American financial system.

  • http://declineandfallofwesterncivilization.blogspot.com/ gaius marius

    i did and it’s typically excellent. doing his dad proud. and you won’t find a stronger advocate for reregulating finance.

    we’re courting genuine disaster if we try austerity just now, but austerity looks to be the direction of the political wind. i suspect the awful consequences will grind out the political will for another round of stimulus. crazy.

    the thing so few seem to appreciate is that there is no way to avoid the deficits. they are coming regardless. as we’ve discussed, they are the result of the accounting identity by which private (including state & local gov’t) savings/debt reduction must equal the government deficit (less net exports, which is a small term). if we’re going to repair the private sector debt problem, there’s no way out *but* deficits. it’s an indication of healthy rejuvenation.

    we can choose if we like to try to cut federal deficits, but the effect will be a deflationary collapse of private sector economic activity that cuts tax receipts so severely that even larger deficits arise anyway (to meet the larger need for private sector debt repair).

    the time to be worried about deficits was when we were deregulating mortgage lending with garn-st germain in 1982.

  • http://www.pragcap.com TPC

    You’re right. The only problem here is that we’re basically papering over the real situation. The private sector remains very weak and the point Denninger’s article made is that its all fake until we get our priorities straightened out.

    Financial reform is a step in the right direction. Changing the US consumer’s recent love of all things debt is a longer-term process, however, and one that I fear deficit spending cannot overcome. The recent uptick in consumer credit was cheered by many, but not this guy. It is a return to the old spending habits and that is potentially disastrous and entirely unsustainable.

  • chris

    corporate cash is at an all-time high, and M&A activity is picking up, a leading indicator. credit expansion soon to follow. you have no idea what my style of thinking is, other than to see and hear what is going on, try not to over-think things, certainly not try to conclude first and support second (sound familiar?), and try to make money. if things get too rosy, i hope the the contrarian in me will trigger sell orders, but jeepers creepers we are a fair ways off from that.

  • http://www.pragcap.com TPC

    True, corporations are strong, but the consumer is still very weak, and unfortunately, is the engine of our economy.

    I really hope you’re right, but a thorough study of the consumer shows that there is much deleveraging to be done and that means the consumer can’t run with the baton yet. Peel away the government layer and there is very real turbulence in the air.

    Trust me, I want the best for this country and everyone living in it. But I am also trying to be realistic and try not to fall prey to the thinking that everything is fine just because the government spent a few trillion dollars.

  • http://declineandfallofwesterncivilization.blogspot.com/ gaius marius

    good points, but i’d be careful with the eye-witnessing. first, a lot of stores have closed — which compresses what traffic there is into fewer stores. and of course much of what’s being bought is heavily discounted and/or traded down (the wal-mart effect).

    states’ sales tax receipts are a more reliable indicator of the amount of cash flow through retail than the fed survey results, and they are still contracting QoQ though at improving rates. we may see minor YoY growth in 1q10. but then we confront the runoff of stimulus and cashflows related to inventory correction in the second half…

  • chris

    i appreciate the post (although the 10% in month, 90% in the next 900 months is a silly exaggeration; my point is that the stimulus was a three year phased jumpstart which wasn’t and will not ever be such a large percentage of gdp in any one year as to imply that there will be a significant headwind in the second half of 2010, per tpc)…http://econompicdata.blogspot.com/2009/03/global-stimulus-as-percent-of-gdp.html)

    will the phase out of the stimulus be a negative for gdp? of course. but do you seriously think that the shadow banking system (securitization) and the wind down of consumer and corporate loans will continue into beyond this year? you are already seeing nontalf securitization of car loans. go buy a bigger beer glass so your glass will be more empty.

  • Michael

    “Apples and oranges. The US government never “doesn’t have funding”. Greece is not the sovereign issuer of their currency. They can’t print. Zimbabwe was a corrupt mess with 80% unemployment. The Weimar Republic was also the same, not to mention, tied to the gold standard.”

    Is there an example where the world’s reserve currency defaulted, debased and/or inflated it’s way out of debt?

    Yes. The pound was the world reserve currency before the dollar but poor debt management coupled with poor geopolitical strategy caused them to loose their advantage. First, the US surpassed Great Britain as the world’s largest manufacturer. China has not surpassed the US in economic output (yet) but it could happen. I think the Chinese economy is in a more precarious position then even the US if the majority of the $1.4 trillion spent by US consumers does not re-materialize. The EU has massive off budget social structure obligations, a ridged economic framework and a poor demographic outlook. In short, I think it is possible to replace the US as the world’s reserve currently but it is extremely unlikely to happen in the next decade. I agree that by definition the world’s reserve currency can not default on it’s debt.

    Can the US in effect default on it’s debt?

    Yes. But I think it is further away then the scaremongers would have us believe. If we keep spending as projected and we go in to a consumer lead double dip then it will be much closer then it is now.

    Will inflation remain subdued with our overcapacity and productivity situation?

    Not necessarily. As you posted not long ago there are already “pockets” of inflation in the system. This is true even with the massive deflation pervading the economy. I think the biggest component you are missing is economic psychology. Stagflation is a real potential risk.

  • percolator

    Hey I’m just the messenger.

    Denninger does NOT support the gold standard:



    Though Denninger can sometimes be over the top much of his writings are based sound thinking and mathematics.

  • http://www.pragcap.com TPC

    Another gold standard myth. The UK defaulted in 1932 largely due to the strains that had been imposed on them by the gold standard (which i believe they eliminated in the prior year). The British Pound had become extremely overvalued due to the strains of the war and their trade was subsequently squeezed which resulted in an inability to fund their spending.

    This is why the gold standard doesn’t make a lick of sense. Why allow your country to get into such a situation just because you can’t import a few billion gold bars to back your currency? It makes zero sense. The gold standard myths prevail to this day because the financial community doesn’t understand how a floating exchange currency actually works to the benefit of us all.

    The United States is in an entirely different situation. We literally cannot default. It is impossible.

    In regards to inflation….there is no borrowing, unemployment is at 9.7%, the output gap is enormous. There is simply not enough demand for inflation to occur. That’s why the data has been and remains so benign on the inflation front.

  • http://www.pragcap.com TPC

    I should add, this is not to imply that we won’t see malinvestment (the housing bubble comes to mind here), but full on destructive hyperinflation is not in the near future. We need to regulate the banking sector so they cannot malinvest in the way they did in the period leading up to the banking crisis.

  • http://www.pragcap.com TPC

    Interesting. Thanks for that Percolator. Sounds like he and I agree on quite a bit.

  • percolator

    I’m curious as to what are the misrepresentations KD made regarding Galbraith’s article?

    And are you saying Germany did not have control over the quantity of their currency?

  • percolator

    Yes, the two of you do agree on many things. That’s why I am a bit surprised by your differences regarding the Galbraith article.

  • http://www.pragcap.com TPC

    He appears to be very nonchalant in attempting to prove his point by arguing that we are at all comparable to Germany.

    This is really complex stuff and would require a full posting, but in an attempt to keep things short and sweet:

    Denninger is comparing a war torn, corrupt and dysfunctional government to the most prosperous stable government in the history of the world. The treaty of versailles effectively crushed Germany following WW1 and bankrupted them. Combined with the political instability, corruption and the retenmark’s peg to the dollar via the gold standard and you basically had a modern day Zimbabwe in many respects.

    With all due respect to Denninger, the very fact that he would compare the two displays a gross lack of knowledge regarding the currency system we live in. The coparisons are just not even remotely fair yet he uses the example as if it proves his point. That is dangerous thinking.

    Other than that, his point is very good. Printing money doesn’t solve the structural problems we have.

  • http://declineandfallofwesterncivilization.blogspot.com/ gaius marius

    sorry — i reread my comment and the start comes off a lot more pithy than i’d intended. no offense given, i hope.

    securitization is a qualified “dead”, imo. one has to understand that the engine of all the credit on offer in 2005 (and the resulting peak cash flows and asset valuations) was in the end the ability to stuff titanic SPVs with trillions in triple-a ABS. nothing like that will be back until the next credit bubble in 50 years.

    will the mechanism continue to exist? of course. securitization is a valuable financial technique. i’m sure receivables of all kinds will continue to be securitized on some level. but it’s important to differentiate — the construct that facilitated consumer demand on the level of 2005 was a ponzi-esque abuse of securitization so wild in scale that it has very few precedents in financial history. even the investment trusts of the late 1920s pale in comparison. THAT is not coming back. and without it there’s no way to refi even extant consumer debt, a great deal of which would not be extended under normal circumstances, much less this period of continuing balance sheet collapse.

    i don’t like calling for a depression-scale collapse of private credit (and i sure don’t wanna live one) but that’s where the analysis leads imo.

  • LVG

    This comment section has become a gold mine. Thanks for your well reasoned approach TPC.

  • Mike

    You say the United States can’t, or at least shouldn’t, default on its debt. Technically speaking and in nominal terms that is correct. However, if someone is paid back in devalued dollars they have lost money in real terms. Real returns are as important, if not more important, than nominal returns.

    When the local, state, and/or federal governments borrow money that is a debt that the citizens must repay in one way or another. I believe most Americans are responsible and NOT behind on their credit card, NOT behind on their mortgage, and NOT underwater WRT their house and mortgage. An increasingly massive debt is being foist on them and they are being forced to bailout and support others. They haven’t even seen the bill they will be forced to pay thanks to this environment of extend and pretend. That is BS.

    Did I read those words correctly… the Fed SHOULD print more money and buy Treasuries?!?! That is creating an inflationary effect where there should be none. Inflation is no free lunch. A year’s worth of inflation increases all future years of expenses unless it is offset in the future. Say the average family’s expenses are $45,000.00 and the money printing generates a 2.6% YOY inflation. That inflation increases that family’s future expenses by $1,170 each and every year the family exists. If it exists for 50 more years then just that ONE year of 2.6% inflation will increase that family’s future expenses by $58,500. Will that family’s income keep up with (potentially compounding) inflation? Scratch that. Will that family’s income keep up with inflation AND the increase in taxes it will have to pay to service the ever increasing public debt that was monetized? I don’t think that is gonna happen. The average person doesn’t come out ahead in an inflationary environment. At least not the average responsible family. Those who aren’t working and/or those who must live off savings (such as so many retirees will have to do) simply won’t have a chance.

  • http://declineandfallofwesterncivilization.blogspot.com/ gaius marius

    on the stimulus, 6% of GDP isn’t small! the socgen analysis i read months ago (which was repeated quantitatively by other houses) showed the falloff from 2009 peak rates of distrubution figures to drag (-2%) of GDP in each of 2010 and 2011 unless further deficit spending is put on the docket. that woudl be a very serious recession in its own right.

    the logic was surely that robust private sector credit expansion would resume and overwash this drag. i kinda agree that investment-led recovery is at least a theoretical possibility — but only if the aggregate private sector credit repair is offset by public spending. without that, deflation will take over.

    we might also do well to remember there appears to have been a similar anticipation of investment-led recovery in 1930 as well, and railroads seem in fact to have engaged in same at hoover’s cajoling — but all that resulted was record low RoI. by 1931 capex was off the table, of course.

  • http://www.pragcap.com TPC

    The United States does not fund its spending by borrowing. China is not our banker. It’s counter-intuitive, but the government actually spends in order to tax. Not vice versa. This is not myth. It is fact.

    Now, all forms of spending are not good (necessarily). For instance, Obama is persistent in passing this silly health care bill which is really just political pandering. This form of spending will certainly increase real inflation and makes us that much more European. Whether that is a good thing is debatable, but in a time of economic ruin and high unemployment I would argue that Obama has his eye on the wrong target. He should be focused on the economy.

    I am not an anti-Keynesian. There are good forms of spending. Infrastructure is a good example. The Chinese high speed rail system is another. But spending billions to bailout banks is largely wasteful. I guess I am an Austro-Keynesian. I think the banks should have died a painful death for their mistakes. Clear the bad banks from the banking system in the same way that Texas did so during the S&L. Now they have the most prudent banks in the country (and no housing bubble!).

    I am in favor of massive regulatory overhaul and intelligent government spending. Right now, we are largely accomplishing neither which means we are basically kicking the can down the road.

    Mark my words, Obama is losing the election every day he chooses healthcare over the economy. He should admit defeat and allow the Republicans to kill the bill. He should then address the nation and explain in common jargon just what the banks did to us. Then he will pass regulatory reform and crush the banks. He would become the champion of the little guy. Then, in term two, do what ever the hell he wants with healthcare. Now is not the time though.

  • http://declineandfallofwesterncivilization.blogspot.com/ gaius marius

    amen to that. he talks a bit about being the president he has to be rather than the one he wants to be — maybe that’s code for saying he has to hold off his restless left by getting this done before he can go back to being the most conservative democratic president since, what, truman?

  • http://www.pragcap.com TPC

    I truly believe he thinks the healthcare bill is his key to term 2 and a legacy that will be viewed as great. He has it totally backwards.

    Great Presidents are almost always remembered by their impact on prosperity, ie, the economy. I am beginning to think more and more that he is on the fast road to the lamest of lame duck presidents entirely because he is ignoring the economy and allowing the banks to push him around.

    He talked tough a few weeks back, but where is his big stick? He could learn a few things by focusing on the Roosevelts.

  • chris

    we agree on most of this.

    in particular, the transformation of a pile of liar loans into a securitized tranche rated AAA is mind-boggling. there was such a demand for loan underwriting that the investment banks bought crap from mortgage brokers sight unseen, preserving a 90 day put back if the loan went into default…but the obligations to repurchase by the mortgage bankers were uncollateralized! fixed income desks of all of the major investment banks were left with worthless puts on worthless mortgages that were coming out of supposedly AAA tranched mortgage pools. and the best and brightest were going into finance. amazing and you are right this won’t happen again soon.

    however, my basic point is that we will be going from zilch securitization recently to a more normal phase, and this will be good for the economy, and more importantly to me, good for equities. since i am long equities, that is my focus. private credit is on the mend slowly, which is just fine. consumers are still risk averse (piling into money markets at a time when rates are historically low) and the recent small blip up in comsumer credit, after i believe 7 straight months of declines, is not a cause for worry.

  • percolator

    Thanks TPC,

    I didn’t interpret KD’s response the way you did. To me he just implied that when you increase the quantity of money there is a cost and just mentioned Wiemar Republic as an extreme example of how dangerous it can be.

  • http://www.pragcap.com TPC

    Perhaps I am being too critical then, but I think it’s really far off base to even make such a comparison.

    There are certainly consequences to spending (particularly inefficient spending), but that doesn’t make it all bad. Especially in time of a consumer driven balance sheet recession.

    Like Gaius said before, the budget deficit is going to exist no matter what in times of a balance sheet recession. People don’t seem to understand that. But saying that all forms of spending is automoatically bad just because it will lead to inflation later on it misguided.

    If we get a little inflation (which would be a good thing in this deflationary environment) and we see a return to full employment and healthy consumer balance sheets then the government will decrease spending and effectively drain the system. If we get to that point then something very awesome is happening in the economy and things will be MUCH improved. We can only hope for that. I am not banking on it, however.

  • Michael

    “He should then address the nation and explain in common jargon just what the banks did to us. Then he will pass regulatory reform and crush the banks. He would become the champion of the little guy.”

    He will not crush the Banks. By “the banks” you primarily mean Warren Buffet. Mr. Buffet and Obama are too close – they need each other. As usual, the little guy will get sold out.

  • http://www.pragcap.com TPC

    I think you’re right. And he will lose in 2012 when the unemployment rate is 8% and he accomplished little to nothing and couldn’t get the economy going again.

  • Anonymous

    TPC – I came across this today by Charles Lieberman of Advisors Capital. Do you still think earnings will not meet analyst expectations in 2H10? “The consensus estimates about $75 in earnings for the S&P 500 in 2010, a cautious figure that is based on a very weak recovery in GDP of around 2.5%. Both figures are too conservative. In fact, profit estimates were significantly too low throughout 2009 right through the fourth quarter. We expect GDP growth between 3.5% and 4%, which implies profits north of $80 for the S&P, possibly as high as $85. Profits in 2011 should approach $100. Using a price earnings multiple of 16 implies an S&P 500 of 1,360, almost 20% above Friday’s close. Using a price earnings multiple of 15 on 2011 earnings implies another gain of more than 10% next year. Neither of these earnings multiples is aggressive, particularly if interest rates remain fairly low.”

  • ATP

    I’m puzzled by Galbraith’s argument. If governments can just create money and spend, why do we even need bank lending? Just print money and give it directly to the people to spend. Or print money and lend it to the people so we pay interest to the government and not banks. Why do we even need private banks?

    The bottom line is that expansion of money supply not backed by expansion of productivity is theft. The producer gets cheated on the fruit of his labor. I think that’s Denninger’s point.

  • http://www.pragcap.com TPC

    I think estimates are aggressive in H2. Next quarter will be a huge beat again (more of what we’ve been seeing). The heavy lifting will begin as the stimulus is wearing off and we’ll see what happens with housing. My guess is we continue glat to down without more government aid.

    This makes for an environment in which the very easy earnings comps are ending. This doesn’t mean we fall off a cliff, but the earnings recovery remains a big H2 hurdle in my opinion.

    I wrote something on this a few days ago:


  • http://www.pragcap.com TPC

    bank lending serves as a way to grease the economic wheels and provide liquidity. That’s really all banks should be allowed to do. These prop desks and other speculative businesses really shouldn’t be allowed to be commingled with the rest of a money center banking operation. The entire idea of banks being profit driven is counterproductive in my opinion. They should be middlemen – providers of liquidity so that businesses can get things done. That’s really all.

    I think the main problem with Denninger’s argument is that government spending cannot be productive. What if they were to implement a high speed rail system across the entire US. Would that be productive? Would it increase jobs? Would it increase aggregate demand and productivity? Absolutely.

    Handing $1T over to a bunch of bankers, however, accomplishes nothing. They assumed lending was reserve constrained, but this was entirely wrong. Banks lend money to anyone who will take a loan. That’s just what they do. Their reserves don’t matter in today’s system.

    Just my opinion….

  • mj

    Even better, why not let people print their own money ? They could just print whatever they needed when they needed it and it would no longer be necessary for anybody to work. Of course, there would be nothing available to buy but this would be Keynesian economics (either full blown like Krugman or partial like TPC) carried to its logical conclusion.

  • http://www.pragcap.com TPC

    Now THAT would be inflationary.

    Everyone makes the false argument that printing = inflation, but they seem to fail in understanding how inflation actually works. Just because there is more money in the system does not mean there is higher aggregate demand. That’s just not how it works.

    Japan has taught us this. America is reiterating it for us now.

  • LVG

    So can just spend and spend and everyone will be happy right? I don’t think I fully understand your austro-keynesian approach.

  • http://www.pragcap.com TPC

    No no no. But things cost money. Police force, better healthcare, etc etc. So the government spends and your taxes go up in order to maintain price stability.

    Obviously, just recklessly printing money will cause malinvestment and potential inflation. I am not an advocate of government intervention on the scale to which we’ve seen it, but targeted stimulus is necessary to a certain extent in order to offset the private sector weakness. If have a certain margin of error with regards to inflation because aggregate demand is so low now. We can’t even create inflation with all the money we’ve already injected. That’s because the consumer is still very very weak.

    What’s more alarming in all of this is the manner in which we have spent. We have bailed out all the people who made the mistakes. They should have failed. All those banks should be gone. Or better yet, we should have RTC’d them a year ago.

    The losers lose, the banks get re-regulated and the government implements a few programs that support the consumer (infrastructure, etc).

    That’s the TPC Austro-Keynesian outlook in a nutshell. Unfortunately, we took a purely Keynesian approach which, as I described in the article, has basically kicked the can down the road while solving none of the structural problems in the economy.

  • mj

    Agree 100%.

  • LVG

    Okay. I think I get it now. So you’re basically saying that the government has to spend now in order to offset the consumer weakness. But we’ll have to pull that money back out later on? And in essence, you’re saying the government hasn’t actually fixed anything so the exit strategy is what is so risky now?

  • mj

    I don’t normally engage in sociological psycho-babble but I would say the bank bailouts have caused huge damage to acceptance of the “social contract” in this country. People see what the banks not only got away with, but were actually rewarded for, and start to wonder why they follow the rules. I’m a Ron Paul supporter so I abhor most of what Obama stands for but if he would seriously go after the bankers I would support him 100%. I might even vote for him next time. I think there are a lot of people who feel the same. Obama has blown a golden opportunity to not only do the right thing but also guarantee his re-election.

  • http://crashthemachine.wordpress.com ctm9000

    Jeopardy: Math problems for $400, please.

    ? – If a train carrying 32 incumbent Senators leaves D.C. this year heading for Armageddon and another train of challengers leaves mad-as-hell-ville 2 hours later, on what day will these two trains collide?

    note: Remember to answer in the form of a question

  • http://www.pragcap.com TPC


    That’s a beuatiful comment.

    That’s how I see it also. There is a massively destructive psychological aspect to what has been allowed to go on here. It gives this impression that the government doesn’t work for us and that we can’t beat the bankers because they’re in bed with the government, etc. It all leads to “tea parties” and other uprisings. People stop looking for jobs because they give up. “You can’t beat the system so screw it” mentality. None of this is good. Obama will get crushed in 2012 if he doesn’t pass bank reform and focus on the economy. Unfortunately, I think he might have already dropped the ball on this one.

  • http://www.pragcap.com TPC


    That’s basically it. We should have RTC’d the banks and implemented LONG-TERM government spending programs such as a national high speed rail system. Just an example, but the point is that all forms of government spending are not bad and many can in fact be quite productive. The spending we’ve implemented has been largely wasteful and short-term thus far. Giving bankers money and providing national healthcare are NOT the forms of spending we need now. Perhaps most important in all of this is remembering the Austrian side of my thinking. The losers MUST lose for a healthy capitalist system to work. A system in which no one is allowed to fail is not the healthy capitalist system that made America so great. People must learn from their mistakes.

  • http://www.pragcap.com TPC

    What is the first Tuesday of November?

  • chris

    “Obama will get crushed in 2012 if he doesn’t pass bank reform and focus on the economy.”

    crushed by who, exactly?

    you seem to forget that this will be a two man race…unless hillary launches a primary fight. (yes, i am ruling out palin.) unless ryan steps up, there is no worthy opposition, whether or not loyal.

  • http://www.pragcap.com TPC

    Obama came out of nowhere to steal the show. There is no reason why someone else won’t do the same thing. If things don’t improve substantially from here he will get voted out just on the idea that he is a big talker and not a doer. The Republican PR machine will crush him as someone that can’t get anything done.

    There is a lot of time til election day. Obama has a chance to turn this around, but he is wasting very valuable time.

  • DH

    The problem is that without structural reforms to the economy, there isn’t anything after the consumer balance sheet is repaired. In order for the economy to grow the output of goods and services has to grow. Given that production and services are still being outsourced around the world while additional labor is being imported there doesn’t seem to be a driver for growth. To a great extent, the expansion of consumer credit is a symptom of the underlying problem rather than the problem itself. We have a lot of work to do to restore a sound economy.

  • chris

    i agree, although i also sense that the world will continue to look to us for innovation. so if we continue to innovate and let others manufacture our ideas, i don’t think things will be entirely bleak. i worry for the time when the world’s next great innovations come from chinese university scientists rather than our own.

  • DH

    Technology transfer is an interesting aspect of our current problem. There is no free trade when we can import Chinese goods but in order for our companies to sell goods to China, they must build a factory in China and transfer the technology. At the pace we have been doing this, we will lose our technological edge. Over time, the R&D will follow the manufacturing as the people with the know how to take ideas and commercialize them need hands on experience. We can’t all make a living running social networking sites.

  • fred

    “Ignore every single one of those parabolic (fear mongering) debt charts you have seen all over the internet and in research reports that attempt to show how scary the U.S. government’s mounting debt woes are (remember, as the sovereign issuer of the currency, THE UNITED STATES CANNOT DEFAULT ON ITS OBLIGATIONS! – see here & an explanation of the continuing deflation threat here). But households certainly can default and do so every day.”

    I think I’ve come up with the perfect solution….printing presses for households!!! Isn’t this fantastic. No more household defaults. Consumption is bound to rise, I might go buy myself a new house tomorrow, cost is no object. Obviously inflation risks are minimal, for the reasons TPC has pointed out above. And, on the off chance that the dollar devalues just a bit, think of the benefits to our export sector. I’m sure China and Europe and Japan and all the rest will be perfectly happy off shoring their manufacturing capacity to us so that we can get back to full employment. Now that we have a nice liberal pres, I’m feelin’ the love from overseas.

    And as an added advantage, we can replace all those cheap items we import now, like everything we buy, with shiny new union made stuff from the good ole USA. Not a problem…once we rebuild all the factories using money from our very own printers since the foreigners aren’t likely to be doing much dollar lending. Price increases as we ramp up this great new economy? Well, that’s what the printers are for, correct?

    I guess one could posit that individuals might be irresponsible with their printing presses, but governments have been irresponsible spenders for decades and they still get the benefit of the doubt from some quarters. I’ll even cut the govt some slack now; if they spend too much, go ahead, raise my taxes. I’ll run off another stack of hundreds for you guys. Keep the change.

  • billw


    It will never matter how smart all of you guys are on finance if you do not recognize the fact that the political system you live in decides how you can or cannot operate financially. Obama is devoted to bringing all of the economy under the control of the government; call that economic type of system by whatever name you will. He is even willing to wreck his own party and be a one term president to do so ( he is on record to that). You and KD are agreed on all points except the possibilty of default. I have read both of your columns for almost a year now. Right now I don’t think there is much we can do to avoid the double dip. I do believe as you do that there are many fixes available to improve our situation going forward rather than making it worse as the current leadership is doing. Obama and the Democrats are intent upon increasing taxes, and that is absolutely the wrong way to go. Many representatives of small businesses have been on various programs making recommendations to improve the situation, not one of them said to raise taxes.

  • billw

    You are correct in the assessment that the economy is only showing positive growth due to the stimulus, but of course Rosie has been saying that for months and even provided data and graphs to back it up. That is why I have always said that this market rally is the only part of the economy that has shown real growth ( growth for bankers and traders but not mainstreet). Just using basic math and the data you have supplied over the months shows there is no way that we are in any recovery. When the railroads were down in 2009 by ~16% yoy, and the same for truck traffic then there could not be a real recovery going on. Those two groups move practically everything that is sold. Also taxes at all levels are down, so where is there a recovery. Then with basically 18% unemployed receiving 50% of their previous pay in the form of unemployment checks, that leads to a drop in GDP of about 6.3%. So the only way we are showing any positive GDP is due to a huge amount of QE and stimulus spending.

  • http://declineandfallofwesterncivilization.blogspot.com/ gaius marius

    from zilch to… well, more than zilch we can agree. that’s the new issuance side. but what of the rolloff of the existing pile? the net change in ABS outstanding remains steeply negative, does it not?

  • percolator


    I see you did not read any of those links I provide in your gold post.

    The UK was not on a Gold Standard, it was a Gold Exchange and there is a big difference. This was a crazy plan that was doomed to fail. Please read about the Genoa Conference for the details:



    The main problem with a Gold Standard or any commodity backed currency is the QUANTITY OF MONEY being backed by it, as bankers and governments have an incentive to inflate the money supply.


    Again, I support Freedom’s Vision – Monetary Reform policy which you can find through the link above.

  • Don

    Yes, fixing the economy is the key. But fixing healthcare is a Gigantic step towards fixing the economy. When the US spends almost 17% of GDP on healthcare vs. 5-10% of GDP spent on healthcare in other developed countries (and they have better health outcomes/results and 100% coverage), then effectively the US is outright wasting over $1 trillion annually. When you consider the coverage and the poorer results, then the US pays at least 3+x as much for healthcare or even way more than $1 trillion wasted annually.

    The problem is not that Obama is focusing on healthcare. It is that he is focusing on a totally misguided and ineffective version of healthcare. Essentially it is just like the bank bailouts and virtually everything else the government focuses on. The politicans are focused on funnelling wealth to the plutocracy, the oligarchs, the special interests, and the money that is “donated” to them to get elected.

    One has to ask how it is that Japan, Germany, Switzerland, Holland, Taiwan, and virtually every other developed country has managed to “enact” responsible national healthcare. Because they all have. And by and large, they are all privately run healthcare systems. Meaning the health insurance companies are private, the doctors are private, the hospitals are private. The only thing these governments have done is to “enact” comprehensive national healthcare rules that all providers and all consumers have to accept. If Obama were to take the same approach in the US, then the economy would be on the road to being fixed. And over $1/trillion annually would be freed up to put towards more productive purposes … such as R&D, infrastructure, solving the energy problem, etc.

    However, Obama, as are all politicans, is beholden to the plutocrats and the vested interests who fund all politicans. And as always, all special interests are only interested in one thing, namely maximizing their share of the pie regardless of whether or not they provide economic value for the good or service they coerce the politicans into giving them preference and “legal privledge” to.

    The only real solution is for a third political party to emerge to combat the corruption endemic in both the Democratic and Republican parties and the big money and special interests that have gained control of them. Unfortunately, most Americans just do not understand the severity of the problem. So, it probably will take another Depression for this to really hit home.

  • OBRon

    Just because consumer credit rises slightly in January does not mark a new trend. If one factors in the fact that a huge segment of shoppers waited until just before Christmas to make their gift purchases – after 2/3 of the December credit card billing periods had already closed – it is no wonder that the additional credit balances from those late purchases would not show up until the January statements. Hence, an apparent pop in consumer credit in January.

    Having gone through difficult times firsthand, I can tell you after a year (or more!) of forced austerity and paying down one’s debts, plenty of people felt compelled to make it up to stressed children and spouses at Christmas. This is not rocket science in the world of consumer behavior!

    What will be more telling will be if the growth of consumer credit continues to form a trend. Considering the depth and breadth of all the deleveraging going on in both secured and unsecured credit (not to mention continued growth of unemployment and commercial deleveraging), my bet is there is no trend.

    Everyone I talk to continues to pare their personal budgets – not the recipe for the Big Recovery so many believe is now underway!


  • sharonsj

    So people spent more than they earned? Do you understand why? If income is stagnant, but the basics all go up in price, then you survive by using credit cards or refinancing your house. Now throw in disappearing jobs, the busting of unions, millions of illegal aliens, the looting of taxpayer money, two wars, tax breaks for the really rich, and so on, you get an an average American who is broke. When the government stimuli and extended unemployment ends, be prepared for more than a double dip. You might finally see rioting in the streets.

  • http://www.thedeadbeatdad.blogspot.com Deadbeat Dad

    Consumer spending is not just about lack of self control and lack of personal responsibility–as persons above noted, their are various root causes which gutted the middle class.

    To that list we can add the ‘Deadbeat Dad’ crisis, which is a government manufactured problem. People often run up credit cards because they are not given any other choice. In NY State for example, there are more than 100,000 family breakups every year, and at least half the men end up bankrupted and near the poverty line. Government policies allow a bankruptcy proceeding to discharge debts,— but other policies prevent the possibility of being able to work your way back up out of the hole.