Posted on 09/19/2010 5:35:25 AM PDT by Zeddicus
By now everyone 'knows' that the US consumer is hunkering down, paying down debt and performing other mythological tasks. Alas, as the WSJ points out today, this is not exactly true... In fact not true one bit. The reality is that over the past two years, US consumers have not been deleveraging as a voluntary act of eliminating debt, but have been actually aggressively leveraging more and more until the bank providing them credit puts them into involuntary bankruptcy, cutting off the money spigot. This is a startling realization, confirming that the average American is actually hyperleveraging to the point where all available credit is forcefully eliminated by a lender institution!
Here are the facts: as the Flow of Funds report demonstrates, total household credit, consisting of Home Mortgages and Consumer Credit, has indeed declined by $610 billion from $13.2 trillion to $12.6 trillion since the credit bubble peak in June 2008. Yet, as Mark Whitehose points out, there are two ways in which this "deleveraging" can occur. Voluntarily, in the form of actual financial discipline, whereby the end consumer makes a conscious effort to pay down their debt, and Involuntarily, which is really not deleveraging, but aggressive leveraging to the hilt, up until the point where banks eliminate all credit access to the end consumer.
Luckily there is a way to quantify which road has been more travelled by. As the WSJ points out, in the period in which consumer credit has declined by $610 billion, banks and other institutions have charged off $588 billion in mortgage and consumer loans. (Our attempts at recreating these numbers using Fed H.8 and charge off data were slightly off, in fact demonstrating that based on charge off data as calculated, forced deleveraging will only accelerate as it catches up to bank charge off runrates). Nonetheless, a good way to visualize this phenomenon can be seen in the chart below:
Putting numbers to the data confirms that of the over $600 billion in deleveraging, only $20 billion or so of it was voluntary, with the balance occurring due to continuously irresponsible borrowing practices, in which US consumers spend, spend, spend themselves into oblivion only to be cut off cold turkey, instead of entering a slow deleveraging rehabilitation which would allow them to shift into the transition to a new creditless normal far easier.
The last observation is key as it has rather startling implications to David Rosenberg's theme of the New Frugal Normal. It would appear consumers do not, in fact, moderate their spending while still in possession of credit (regardless of its cost) - quite the contrary: they accelerate spending until the charge off threshold at the lender is breached, and all credit is cut off, also resulting in a collapse in a creditor's FICO score, cutting him or her off completely from future (at least near term) credit access. Thus what is occurring at the end of a typical consumer credit lifespan, is not a whimper but a massive bang. What happens after may require Stephen Hawking's explanation rather than David Rosenberg. The conclusion is that consumers do not pass a moderate "go" on their way to insolvency, they go from hyperleverage straight into bankruptcy.
What this means for consumption as observed on the supply-side, i.e., sales at stores like Nordtstroms and Barneys, is that instead of trendlines being indicative of what is truly happening behind the scenes, we have now entered a phase where sales will spike only to drop off in a quantized, step-wise fashion, rather than a linear drop off. This would make all the sense in the world, when one considers that side by side with the observed "deleveraging" of consumers, sales at aspirational store concepts are in fact surging, as the broke middle class performs one last "swan song" rampage of purchasing every Gucci and Chanel bag available, before saying goodbye to credit for a long, long time.
And with unemployment still at record highs, and soon to take another leg higher, paychecks continuing to decline, excess capacity at record highs, 99 week EUC and Extended Claims reaching their ceiling 2 year anniversary from the Lehman collapse, and the general economy double dipping, the implications of this will be dire, as there will be no gradual decline. Instead, to borrow another cosmological term, instead of the US economy decelerating at a rate proportional to the removal of credit from the system, it will grow and grow until it hits supergiant status, only to collapse into a neutron star (or worse) singularity, in which only the Fed will be left beyond the event horizon, only to suffer a similar fate in its last ditch failed attempt to stimulate hyperinflation and rescue the US consumer and banking classes from the infinite gravitational pull of a failed Keynesian experiment.
Makes perfect sense. A deadbeat owes more than he can pay back, knows he is facing bankrupcy (a free pass) and has some left on his cards. Max them out before they get pulled makes perfect sense. The fact that they are deadbeats doesn’t mean they are stupid. They have spent their entire lives gaming the system.
But I can also testify that doing so IS WELL WORTH THE PAIN needed to get there.
In terms of material consumption, I'm now living under dramatically lower standards of living than just a little over a year ago, but I've never felt so free in my entire adult life. I didn't realize I was living as a debt slave in an illusion created by borrowed money until I shook off the shackles.
We now have a tiny home mortgage that is less than the second mortgage was on our previous home. Yes, it's a smaller, more modest home than the suburban McMansion prison we lived in the before, but we're much happier here.
Having rid ourselves of a massive debt burden (both mortgage and credit card), I'm amazed now to see how we can live on 1/4 of our previous income with some additional judicious frugality. I wish more people would learn to bite the bullet and shun debt on their own, rather than have it forced upon them.
People also need to realize that their debt is effectively enslaving them directly to the ruling political class of our federal government, who now owns the income streams from most all interest-bearing debt instruments.
… confirming that the average American is actually hyperleveraging to the point where all available credit is forcefully eliminated by a lender institution!
Guess I’m not an “average American”.
I am paying down debt, I have stopped buying anything but groceries and booze. It hasn’t been exactly “voluntary”, I just realized that I had everything I wanted. Over the last 2 years I’ve bought a new laptop to replace one that died. I traded in my 13 year old Chevy for a 5 year old Chrysler in mint condition and very low mileage. That car payment is my only debt.
I now find myself with disposable income. For the first time in my life I actually have a sizable (to me) savings account at my credit union. I’ve even managed to buy a few ounces of gold and silver.
To President 0bama: I apologize for not buying more consumer goods and stimulating the economy – but I can’t think of anything to buy.
ff
That is exactly it. Everyone games the system, and it doesn't take a genius to do it either. I know otherwise stupid people, who talk about the ways they game the system. They sound like master Poker players discussing their strategies. They play the game until they are all tapped out, then they move on to another table and play again. Its amazing.
Me too. Mr. Obama tear down these walls!
Let imagine if slave owners of all times, lords over serfs who are doomed to pay rent forever, their children to be born into slavery/debt/serfdom...lets say the benefactors came back to life in our modern era. What would Neo-Slavery look like?
Take it from one who knows, bankruptcy is hardly a “free pass.”
A wise a rhetorical question meant to prompt one to observe the obvious: Neo-slavery is exactly what we have today in the form of government induced debt-driven consumption.
What we have today thanks to debt bondage is materially indistinguishable from indentured servitude, except it's even worse because we are now indenturing ourselves to our political rulers rather than private individuals. I'd rather be bonded to a private individual than the political elite who make and enforce the rules.
I have a cousin who just fled his debt and other responsibilities. He ran up a ton of debt, loaded up a U-Haul and headed to Oregon. He would have gone to California but he has a history there too.
I don’t think people are wildly spending just to run up debt, except in rare occasions. They have lost income and using credit cards to live on until they are cut off. Furthermore, every person I know has cut way back on spending and debt accumulation. My group of acquaintances cannot be all that different. Banks are aggressively reducing lending lines to cusomers, even good ones. It should not matter to people deleveraging.
Oh I agree completely. Alot of people are well and truly screwed, and are living off additional debt for as long as they can. It's good that you appear to hang with a group of people who know better and are making cuts out of their own frugal wisdom, but look deeper:
There are a great many debt slaves out there who still have $100+/mo cell phone contracts, $100+/mo HDTV service, high payments on expensive vehicles, and still seem to have money to go out to eat and buy beer, cigarettes, and gas for their SUVs. My sympathy is limited.
I went through this phase in 1995, when I suddenly accumulated about 50% of my income in debt. (my fault, dumb investment) I stopped buying everything except food, and just spent nearly two years working, paying off credit cards, and riding my bicycle through the nearby park for leisure. At first to see your debt balances barely move it is demoralizing, but after a while it got very motivational to see how close I was getting. When I paid them to zero, they have stayed there. Now, while I am hardly rich, I always have enough cash to get me through hard times.
Unfortunately, my big mistake is that my family knows my financial condition, so I have become the source of welfare for a family member that can't seem to learn to live within her means. So my advice to the frugal is don't let your family know.
>>Let imagine if slave owners of all times, lords over serfs who are doomed to pay rent forever, their children to be born into slavery/debt/serfdom...lets say the benefactors came back to life in our modern era. What would Neo-Slavery look like?
Student loans.
Those debts are non-dischargeable in a bankruptcy. The FedGov just took over the entire program and cut out private bankers. They are creating a class of FedGov-owned indentured servants.
Old habits die hard. We are in this mess because a good chunk of our fellow citizens ran wild with credit.
I am frugal by nature and I have watched my friends and family allow themselves to be controlled by their possessions. They live frantic lives that don’t allow for thought, just pay for this so I can have that and then off to the next possession or activity.
It has almost been expected by our consumer culture, husband and wife must both work so you can spend, spend, spend but I don’t think that they ever slow down long enough to see that what really gives them joy is time with loved ones and they are too busy taking care of their possessions or acquiring more.
One element that original article neglected to mention; or rather, two.
First, what of those who had been living within their means, but got offshored / downsized / caught in a corporate bankruptcy?
Hard to pay off bills on an unemployment check.
Second, what we are seeing is an evidence of bubbles as malinvestment: people borrowed against future cash flows to pay absurdly high prices for houses.
As their incomes fell, or credit was cut off, or whatever, the inflated house payment is "non-discretionary" income: they no longer have the option of selling the house to move into cheaper lodging, and the extra money (pure profit to the banks and the foreign governments / hedge funds / pension funds) going to the mortgage, can no longer be used to pay off other debt.
The irony of it all is, even the inflated payments on those homeowners who *remain* current, are not enough (despite the mathematical 'wizardry' of the quants who developed tranches) to salvage the solvency of those holding the bag on mortgage-backed security, against the tsunami of those erstwhile homebuyers who *did* default.
The bankers, and the members of Congress who profited from all this (before the bubble burst), are the ones to blame for all of it.
(IF they hadn't aggressively pushed credit, beyond any historical bounds, then people couldn't have borrowed beyond their means.)
NO cheers, unfortunately.
During the Democrats' push for the tyrannical power move which they labeled "health care reform," Sen. Baucus said proudly: "It is a shift, a leveling . . . ."
America's liberty and prosperity for over 200 years was based on another idea. Under the Founders' ideas of liberty, earnings of hardworking citizens were protected from the coercive hand of government by a written Constitution which did not allow the Baucuses, Obamas, Pelosis and Reids of the world such "taking" power.
Hear Samuel Adams:
"Is it now high time for the people of this country to explicitly declare whether they will be free men or slaves. It is an important question which ought to be decided. It concerns more than anything in this life. The salvation of our souls is interested in this event. For wherever tyranny is established, immorality of every kind comes in like a torrent, it is in the interest of tyrants to reduce the people to ignorance and vice.” - Samuel Adams
And:
“The utopian schemes of leveling and a community of goods, are as visionary and impractical as those which vest all property in the crown. These ideas are arbitrary, despotic, and, in our government unconstitutional.” - Samuel Adams
Some Americans finally are seeing that so-called "progressive" policies are ruining the American dream, destroying the Creator's gift of liberty for individuals, and setting the nation on a plunge into bankruptcy. They may now respond to positive statements of fundamental principles, because, as in 1776 and 1787, those principles are "self-evident." The principles must be articulated clearly, however.
While serving with the U.S. Army in Germany, I lived off-post in a picturesque farm village. At the top of the steep hill above the village was a ruined castle. Only the massive stones of the foundation remained.
I asked a local what happened.
“Well, a few hundred years ago, the nobles of that castle taxed and oppressed the peasants until one day the peasants stormed the castle. They killed all the nobles and took the stones to build barns. The nobles never rebuilt the castle.”
I foresee a time of pitchforks and torches.
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