Paper Economy - A US Real Estate Bubble Blog: The Credit-Wealth Cycle: Consumer Credit Outstanding August 2009

Thursday, October 08, 2009

The Credit-Wealth Cycle: Consumer Credit Outstanding August 2009

Credit has become such a fundamental factor in our lives that we scarcely know how to differentiate it from actual wealth.

That’s one of the basic lessons from the housing and consumption boom… provide enough easy debt for a long enough period and eventually you get an economy that is more levered to assumed future wealth (… often just fictional or wishful thinking) than to current real wealth.

The business-wealth cycle has become the credit cycle.

If either access to credit contracts or households willingness to take on more debt wanes…. or both… it is tantamount to a loss of income… a real loss of wealth.

In August, total consumer credit outstanding (see dynamic chart below) declined by 4.4% on a year-over-year basis… the largest annual decline since June of 1944.

After a stupendous, nearly 20 year run of continuous expansion, it’s obvious that access to credit (widely reported cutting of credit limits) as well as the willingness to access credit are both firmly on the decline.

Labels: consumer credit, recession

6 Comments:

Is consumer credit a leading indicator? I guess not. It only tells you what happened, but not what will happen. A lot of misleading readings on the blogsphere nowadays.

By JGU, at 12:14 PM
Another famous misleading number is the total debt to GDP ratio, that number itself doesn't have much meaning at all. Suppose there are only 2 people in the world, case 1) A owes B $100, B owes A $100; case 2) A owes B $200, B owes A $200; case 1) and case 2) are fundamentally equivalent, but if you count the total debt, they are not! Talk about non-information.

By JGU, at 12:19 PM
Im not implying its a leading indicator... given the events of the last year I'm not really sure there any real leading indicators ...

The point is that when you have a population that cant seem to discern debt from wealth then when debt outstanding contracts (either by banks retrenching or the consumer gaining long lost senses) households will feel it as if it were their wealth contracting.

A contraction in your ability of tendency to borrow earnings from you future is like losing earnings today.

As households realize that their ability or willingness to borrow has taken a fundamental turn for the worse they will continue to retrench... much in the same way retirees cut back when they settle into their fixed income.

By SoldAtTheTop, at 12:21 PM
The only Americans will cut back spending are those who exhausted all their means to pay, if only they CAN borrow and spend, they'll do it. In that sense, I don't believe anything will change going forward, until this government goes bankrupt.

By JGU, at 1:18 PM
The whole system now is on life support with FED being the rescuer. I simply don't believe they can exit from the MBS market, what will happen to the housing market and the rest of the financial system if they exit? They are 80% of the market right now! I think they'll keep monetizing, keep printing, keep devaluing the dollar, until all the credit nations are fed up, by then, the system will collapse. From now to then, asset prices will keep rising.

By JGU, at 1:24 PM
hear you but I just dont think the housing market will re-inflate anytime soon... I think that dog is dead for the time being and with boomers forcing the US headlong to a posture of household destruction rather then formation I can't even imagine when it will be back.

Deflation still appears to be the most likely outcome of this period... inflation I suppose later but for now all I see is deflation.... boomers deflating, jobs deflating, houses deflating, incomes deflating, general consumer prices deflating... I suppose commodities and stocks are the lone hold outs BUT even stocks in real terms have been deflating since 2000... so its still all deflation to me... obviously I can be totally off... but I just dont see another compelling explanation.

1. Stocks deflating in real terms for 10 years.
2. Participation ratio (% of population employed in nonfarm payrolls) dropping for 10 years.
3. houses deflating since 2006 in some areas over 50%
4. Unemployment at a 20 year high
5. Incomes declining.
6. Credit contracting at fastest annual pace in over 60 years.
7. Boomers woefully unprepared for retirement yet the clock waits for no boomer.

Add to that..

1. China obvious idiotic bubble.
2. Our stock market experiencing absurd rally.

Things are not well.

By SoldAtTheTop, at 1:47 PM