Epic Consumer Credit Crunch!

The January results of the Federal Reserve’s Assets and Liabilities of Commercial Banks report indicated that total consumer loans at all banks are contracting at the fastest rate in at least 63 years.

Dropping 1.87% from December 2009 and 6.10% since January 2009, total consumer loans appears to be accelerating into a contraction the like of which has not been seen before.

The certainly has the earmarks of a significant consumer credit crunch and appear to suggest that economic activity is likely continuing to slow.

Taken together with this months the ending of the Feds TALF program, it would appear that households will be facing likely the tightest credit conditions seen in generations.

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.