THE PRAGMATIC CAPITALIST » » UNPRECEDENTED PLUNGE IN CONSUMER CREDIT CONTINUES

UNPRECEDENTED PLUNGE IN CONSUMER CREDIT CONTINUES

7 October 2009 by TPC 7 Comments

Consumer credit fell 13% year over year in a sure sign that the deleveraging cycle is alive and well. Consumers are paring back on credit in an unprecedented fashion.

Those who are curious as to why this recession is different from past recessions need look no further than the following chart. You’ll notice that consumer credit is falling at a rate that has never been seen before. In fact, consumer credit declined marginally during the 1991 recession and actually climbed throughout the 2001 recession. Why is this important? An economy that is based on a fractional reserve banking system has trouble expanding if the debt in the system does not continually expand. Consumers are still deleveraging and that means a robust and sustainable recovery is unlikely to occur.

The biggest risk in such an environment is not whether the consumer recovers – the consumer needs to deleverage and clean up their balance sheet – but whether the government continues to pummel the currency and rack up massive debts as they try to dig our way out of the debt hole. These are the same mistakes Japan made in the 90’s. Let’s hope we wise up and stop the printing presses before they cause an even larger boom/bust cycle….

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7 Comments »

MS said:

Market always shrugs this off. Why?

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# 7 October 2009 at 12:27 PM

TPC (author) said:

MS – Investors are only focused on earnings right now.

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# 7 October 2009 at 12:30 PM

Naa said:

TPC, isn’t that gap being filled by the govt. debt?

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# 7 October 2009 at 2:24 PM

TPC (author) said:

That’s the point – the government can’t fill that gap forever….

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# 7 October 2009 at 2:31 PM

BleakoEcobamics said:

The government can fill the debt gap longer than the country can stay solvent …

oh wait …

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# 7 October 2009 at 4:52 PM

Otter said:

TPC –

Where can one find historical data on Mortgage Debt Outstanding, on the Fed’s stat page I can only find data going back to 2006…I think to get a good picture of how much leverage is built up on system we need data from 1990s…etc. Also, I noticed the graphs are from the St. Louis Fed…does one need to go to the regional Fed sites to find the charts/graphs?