Posted by Karl Denninger
Look folks, this is really quite simple.
Economic Stability and Recovery = Credit Expansion.
We cannot recover until we purge the excess debt from the system, and the longer we take to do that, the longer the pain will last and the worse it will be.
President Obama and Tim Geithner know this – that’s why they are constantly harping on banks to “lend more.”
Well, they may want banks to lend more but the people are fed up with being debt slaves and are borrowing less.
Today, we got the latest from The Fed on this subject:
Consumer credit decreased at an annual rate of 8-1/2 percent in November. Revolving credit decreased at an annual rate of 18-1/2 percent, and nonrevolving credit decreased at an annual rate of 3 percent.
I have updated the charts, and this is where we are as of November:
Non-revolving debt (basically auto loans) has pretty much stabilized since mid-year. But consumer revolving debt – credit cards – continues to accelerate in its rate of decline.
The longer-term view looks like this:
These rates of decline are unprecedented and they are not slowing down.
The drop in credit card debt outstanding is on the largest on record since The Fed started keeping those records in 1943!
There is none!
It is axiomatic that you can pump yourself full of speedballs (e.g. government spending) and stay up for days at a time. It is also true that if you do too many speedballs you will have a heart attack and die, and there is no way to know precisely which is the “one too many” until you shoot it – at which point it’s too late to change your mind!
The so-called “recovery” has been driven by pump-priming, which has had at its root one primary intent – to drive citizens into herd behavior and get them to spend more and more (that they don’t have!)
But at the same time this has been the message credit card rates have been ramped and lines slashed. So now Joe Six Pack is faced with a 30% interest rate on his credit card – if he has any open line left!
There is no possible way for this program to work, since the entire problem originally – what began this recession – was people that were unable to make their debt payments in the first place!
Small business will not hire until their debt load comes down to a reasonable level. This will take literal years if we don’t quit trying to prevent the contraction of both asset prices and credit levels. In the mean time millions of Americans will remain in destitution!
There is no way to avoid the bankruptcy of those firms and individuals who are over-levered. The best solution (take the pain now!) will not prevent the bankruptcies, but it will get them over with and let the nation begin to emerge from the morass within 12-18 months. For every month we keep trying to prevent the liquidation of insoluble debt we add months of additional time to that required to resolve the bust and deepen the amount of pain that must be suffered, since all we are doing is adding more debt upon existing debt.
It is time for Washington DC, including The Fed and Congress along with President Obama to embrace the facts – we must finish the de-leveraging that is necessary to return the citizens and corporations of this nation to fiscal health. At the same time the government must stop spending twice what it takes in in taxes.
We have consumed too many speedballs, our heart rate is now 160, and if we don’t cut it out the bond market is telling us that we are about to have a fatal heart attack.