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Archive for the ‘Consumer Credit’ Category

The end of debt-based affluence: welcome to The Last Christmas in America (TLCIA).

Almost 35 years ago, as unemployment rose toward 10%, the January 1975 cover of Ramparts  magazine blared: The End of Affluence: The Last Christmas in America.(TLCIA)

The article wasn’t referring to the religious celebration; it was referring to the postwar concept of Christmas as the frenzied, exhausting  year-end pinnacle of our one true secular faith, Consumption, a final orgy of   buying and binging.

It is instructive to recall how the Federal government responded  to unemployment, high inflation and rising  budget deficits in the early 1970s: it began fudging numbers, manipulating data to mask the politically inconvenient realities of rising inflation, unemployment and deficits by playing switcheroo with Social Security Trust Funds, inflation data, etc.–games it continues to play in 2011 to cloak reality from the media-numbed public.

The market was not so easily fooled. The Bear market, reflecting the “real”  recession, lasted 16 years, from 1967 to 1982. Now statistics are echoing that last great recession: rising prices for essentials, systemically high unemployment and stagnant wages while the corporate media and the organs of statistical manipulation (a.k.a. the sprawling, putrid public-private cesspool of the Ministry of Propaganda) trumpet “the return of growth” and skyrocketing corporate profits.

(Today’s propaganda:housing starts blip up due to statistical noise, and though starts are less than half pre-recession levels, this is heralded as “evidence” that “strong growth is back.”)

The difference between the postwar boom of 1946 and the boom that followed 1982 is the last boom was based on the explosive expansion of debt.People didn’t save and invest in productive assets; they went into debt to consume more and to become a “bigger” persona via the miracle of credit.

I often use this chart to make this point: if credit had expanded along with GDP, then we’d be considerably less indebted.  Instead, it required a vast expansion of debt–some $30 trillion more than the rise in GDP–to fuel the 1982-2000 boom.

A funny thing happens when you depend on expanding debt to fund your consumption:eventually the cost of servicing your rising debt reaches the limit of your income, and you can’t borrow any more, unless interest rates decline so you can leverage your income into higher debt.

Here’s a chart of household debt: that little reversal in debt expansion sent the economy into a tailspin.

Lowering interest rates extends the era of debt-based consumption, but it only puts off the inevitable crash when the ability to borrow runs out. Eventually the cost of servicing this lower-interest debt absorbs all your disposable income, and the borrowing skids to an abrupt stop.

Two other bad things can make this dominance of debt servicing worse:your income can decline, and the value of your assets can decline.  In this unfortunate situation, you’re ability to service your existing debts is crimped by a loss of disposable income, and you’re paying for assets whose worth has fallen below the  debt taken on to buy the assets.

Income has declined significantly in the wake of the 2008 crisis/recession:

And here’s the key asset of the middle class, housing:

This double-whammy of lower income and lower asset valuations is exactly where we are now.This is why the Fed’s campaign to lower interest rates to zero and make it easy to borrow more have been as successful as pushing on a string; the economy is choking on over-indebtedness and overleveraging of stagnating income. There is no escape from this vortex except refusing more debt and writing off existing debt, wiping it off the balance sheets as an asset, driving lenders, banks and those holding debt as assets into insolvency.

As we saw yesterday, the velocityof money–that is, money actually being borrowed and spent or invested in the real economy–has plummeted to zero.

We all know the 16-year recession/malaise back in 1967-1982 had a “happy ending”:  huge new oil fields were discovered in Alaska, the North Sea, West Africa and elsewhere, ushering in a renewed era of cheap, abundant petroleum. President Reagan “saved” Social Security for a generation by raising contributions paid by employer and employees, and he heralded a “lower taxes, higher permanent deficits” ideology that is now accepted as the norm: deficits don’t matter, even when they reach the trillions, because our good friends the Gulf Oil Exporters and Asian exporters will buy all our debt forever, keeping interest low forever.

(And if they drop the ball, then the Federal Reserve will print money and buy the Treasury bonds. Sweet! We don’t need any external buyers, just the  Federal Reserve.)

Then the U.S. created and launched two revolutionary technologies which both created new wealth around the globe: the personal computer (microprocessor and cheap RAM) and the Internet (TCP/IP, Ethernet, and the commercialization of Tim Berners-Lee’s World Wide Web with free browsers) spawning the generation-long boom of the 1980s and 90s.

Beneath the surface of this innovation-driven boom, however, the real engine of growth was debt and the financialization and globalization of the economy.

But when the wheels fell off that debt-fueled boom in 2000, the U.S. did not create a new engine of wealth: it opted instead for a devilishly insidious simulacrum of wealth: debt which rose at an exponential rate throughout the economy.

Borrowed money and phony financial legerdemain (mortgage-backed securities, derivatives based on the MBS, etc. etc.) from 2000-2007 created what I have  termed a “bogus prosperity”: no actual new wealth was created, only a brief and doomed bubble of debt-based housing valuations was inflated which followed the classic model set down by the Tulip Craze in Holland hundreds of years ago: insane boom, crushing bust.

We have to revisit the early 1970s for a reality check.  In post-industrial America circa 1970, a huge surplus of food was grown by a mere 2%  of the workforce. The cornucopia of manufactured goods was produced by about 20% of  the workforce (hence the phrase “post-industrial”), and other than essential government services like the Armed Forces, police and the courts, the rest of society’s work was either service-oriented paper-pushing relating to affluence (insurance), do-good selfless work (Peace Corps, churches) or leisure-related: entertainment, films, travel, amusement parks, stereos, etc.

This was not all fantasy.A friend of mine supported an entire  house of hippies in  late-60s Pittsburgh on his union steelworker job, and had plenty of money left to save for his trip to San Francisco. (As I recall, the rent for the big old house was less than $200 per month.) Hippies were the first ardent dumpster-divers/scavengers, driven not by poverty but by the idea that since that our society generated so much waste and surplus, why bother working?

As noted here many times before, the purchasing power of American wage-earners reached a plateau around 1973 and has been declining ever since.

One key point which is usually overlooked when comparing “The Last Christmas in America” circa 1974 and TLCIA circa 2011: the wealth distribution in the U.S. was much flatter then.CEOs of financial institutions did not earn $10 million each; there were no hedge funds with chiefs pulling down $600 million each (yes, that was the average “compensation” for the top ten fund managers at the hedgies’ glorious peak), and even minimum wage ($1.60/hour in the late 60s, I know because my wage stub recorded it) bought far more goods (purchasing power) then than minimum wage does now.

Not only was gasoline cheap, but housing was far and away cheaper than it is today. Just about any G.I./Vet could buy a house with his/her V.A. benefits (3% down), and anyone else could scrimp and save for a few years and then buy a house for 2 or 3 times their annual wage at an interest rate around 6%.

Meanwhile, in TLCIA circa 2011, obscene “compensation packages” are defended as “free enterprise.” Well, what did we have in 1973? Unfree enterprise?Amidst all the ideologically convenient defenses of heavily skewed “compensation,” we have to admit that the dream of affluence combined with leisure was based on the presumption of society’s wealth being distributed somewhat evenly, not by a Communist central state but by the “free enterprise” system and modest common-sense government regulation  (limited work hours,  minimum wage, etc.) which protected employees from the excessive exploitation of the late 19th century and early 20th century Monopoly Capitalists.

That dream seemed at hand in 1970. Now, after “the limits to growth” were mocked by those expecting ever larger oil fields to provide endless abundant cheap oil, we find that Peak Oil was merely put off a generation; there have been no new discoveries of super-massive oil fields since the early 1970s, and the supposedly abundant alternative petroleum sources like shale oil are horrendously costly to exploit, for they require vast quantities of energy (mostly natural gas at the moment) to be consumed to extract the oil.

Now we face a future which might well be called the End of Work for up to a third of the current workforce.Since agriculture employs about 2% of the workforce, industrial/factory production about 11%, essential transportation and essential government each a bit more, we have to ask: in an economy in which 70% of GDP is consumer spending, how many jobs are actually essential? How much actual wealth is being created/produced in the U.S. and sold overseas? Is giving people with Medicare coverage handfuls of costly and often ineffective medications and endless MRI  tests actually creating wealth, or it mostly squandering it?

We might also ask: how much of the consumer economy is superfluous if wage-earners shift values and decide saving is more important than consuming? How many malls, storefronts, internet retailers, restaurants, fast-food joints, etc. can a newly-frugal economy support?  How many dog-walkers, derivative salespeople, nail shops, carpenters, financial planners, realtors, etc. does an economy need if the FIRE economy (finance, insurance and real estate) is shrinking?

Based on the tremendous size of the service economy, construction, finance and government, I have estimated that 30 million jobs out of the current 139 million-strong workforce are superfluous.  Many government positions are essential: police, meat inspectors, rangers, tax collectors, meter maids, etc., but as Mish so thoroughly illustrated in his detailed analysis of the California state budget ($120 billion or so), dozens of State agencies could be eliminated without any visible effect on the economy except to the wage-earners who lost their jobs.

If 20 million jobs disappear (7 million have already vanished since 2008), so do all the taxes  those wage-earners paid; if 5 million homes go through foreclosure, the inflated property taxes the owners once paid will disappear, too. Once businesses close, it’s not just wages which disappear: all the junk-fees governments levy disappear, too: the business taxes, the licensing fees, the permits, transaction fees, etc.

Does anyone think all these taxes and levies can fall and government employment will be funded by some other source?  Yes, the Federal government can borrow apparently limitless sums  at low interest rates; but soon, the surplus money which has piled up in exporters’ accounts will be gone, and the  endless borrowed trillions will actually start costing real money–money that will be diverted from government employment to pay the interest on all that wonderful debt everyone loved when they got a piece of it.

So how does a society deal with the End of Debt-Driven Consumerism, the End of Cheap Oil  and the End of Work when it also means The End of Affluence, even for many of those with jobs?  How does government deal with declining tax revenues and rising interest rates?

The death throes of the debt-based consumerist lifestyle are already visible beneath the glossy propaganda of “rising revenues this Christmas season.” Those revenues were obtained by selling goods at below cost, in the absurd hope that income-strapped, over-indebted consumers would make profitable “impulse buys.” As Mish has documented, the “impulse buys” are being returned even before Christmas to the tune of hundreds of millions of dollars.

The Fed is desperately attempting to re-inflate the debt bubble by lowering interest and mortgage rates and buying up all sorts of semi-toxic/impaired  debt. What the Fed dreads is the reality we all feel and see: fear of the future  due to diminished wealth and insecure incomes.If your assets have fallen in value,  you feel poorer because you are poorer. Borrowing more at any interest rate will not make anyone feel wealthier.

People who fear their income may plummet due to layoffs or their hours being cut are not in the euphoric mood to borrow more, and banks which cannot dare to lose more money loaning to people who will default have cut off credit to millions of  previously rabid consumers of debt.

Ask yourself this simple question: how much stuff could people buy if they could only spend surplus cash, after all their expenses and debt servicing payments were paid in full?

And let’s not forget that much of what is purchased in this consumerist frenzy is needless, superfluous crap.  My wife saves the most egregiously gift-buying-frenzy advertising circulars, and one from Bed, Bath & Beyond caught my eye.

There is no difference between this “1001 Best Gifts” from BB&B and a parody of consumerist excess.Hmm, how about an “executive standing valet” rack of wood and plastic for $99.99?

To make this poor-quality contraption, a forest somewhere in a Third-World kleptocracy  was cut down and precious, irreplaceable oil was burned shipping the lumber to China and from that factory to the U.S. across 6,000 miles of Pacific Ocean.

We know this spindly piece of garbage will break in a matter of days, weeks or maybe if the owner is especially careful, months; then the legs will break loose of the base, the towel bar will pull out, etc. and the “we cut down a priceless rain forest to make this” piece of human handiwork will be put on the curb where a diesel-burning garbage truck will haul it to the landfill along with all the spoiled food Americans throw out.

The 16-bottle wine cellar/cooler from China (labeled Cuisinart for your consuming pleasure) for $199.99 might come in handy storing something once it’s unplugged–but a cardboard box will probably do just as well.

I for one will not mourn the last debt-consumerist Christmas in America. Good riddance to the flaunting of borrowed money and the heedless, desperate purchase of valueless “goods” as gifts for an insolvent nation awash in too much of everything but common sense, integrity, gratitude, accountability and healthy living.

Charles Hugh Smith – Of Two Minds

The endgame of the credit card nation – 40 year bull market in revolving debt expansion comes to a sudden halt. U.S. consumers on average have 4 credit cards with 1 out of 7 having 10 or more.

Credit cards are the gateway financial opiate of choice for many spenders.  Banks understand that if consumers begin mistaking debt for actual wealth then this would lead to more willingness to borrow on bigger ticket items like cars and homes as the appetite for credit expands.  This psychological gamble paid off multiple dividends over the decades as many real income strapped Americans started confusing housing debt, auto loans, and plastic shiny cards in the wallet as some kind of newfound wealth.  Access to debt suddenly became a new definition for wealth.  No other country has manic usage of debt like the United States.  1 out of 7 Americans carries over 10 credit cards.  Another 1 in 7 uses at least half the balance on their credit card.  How is it possible to give so much access to debt to a nation where the average per capita income rounds out at $25,000?  The misguided notion that deficits do not matter that engulfed the country like a bad fad in the 1970s and 1980s largely set the stage for our current peak debt situation.  Credit card debt is now fiercely contracting and the 40 year run is over.

Credit card debt ends 40 year bull market

Since the first credit card was introduced to the American public it took off like apple pie, pinball machines, and gnomes on the front lawn.  Initially the credit card was extended to people that could demonstrate actual creditworthiness to their local bank since it was their money on the line so the prestige of carrying a card actually meant something.  As we neared the peak in 2008 $975 billion in credit card debt was floating in America all the while the economy was beginning to fly off the financial cliff.  This insanity permeated to other countries where even a cat landed a credit card:

“(News.Au) MESSIAH Campbell was considered a good enough credit risk to be given a card with a $4200 limit – which was surprising, considering he’s a cat.

His Melbourne owner Katherine Campbell wanted to test the limits of her bank’s identity screening process and applied for the Visa credit card on Messiah’s behalf.

She was amazed when it was approved.

“I just couldn’t believe it,” she said yesterday. “People need to be aware of this and banks need to have better security.”

What can alter a system to a point where Garfield is getting credit cards?  We went from locally scrutinizing individuals to verify if they were capable of paying back their obligations to actually searching for anyone (or thing) that would be willing to sign on a dotted line so the debt could be packaged up into a security and shipped off to Wall Street for speculation.  The collapse in credit card debt reflects a tipping point for the American consumer.  No longer will 0 percent offers to anyone and everyone be offered unless you are a too big to fail bank searching for a quick loan from your drinking buddies at the Federal Reserve.

Why has credit card debt contracted so quickly?

The contraction in credit card debt has happened relatively quickly:

2008-11:               $974 billion

2011-03:               $785 billion

$189 billion in credit card debt (19%) disappearing is no small task.  Much of this has occurred through bankruptcies and banks actually shutting down credit lines or lowering limits:

“(Las Vegas Review Journal) The typical individual reduced his credit card debt as well, to $6,170 from $7,883, Lin said. However, Lin attributed that partially to lower credit card limits for many consumers.

The typical Nevadan has a 660 credit score, about the same as 662 a year ago. That’s not far below the national average of 667, but it’s nothing to brag about.

“It’s not a great credit score,” he said. A consumer with that kind of score probably pays higher interest rates on credit cards, he said.”

That is a sizeable decrease.  Much of this is happening not by individual choice but because banks are shutting down the credit lines for most Americans.  Keep in mind that the purpose of the large bailouts was to keep credit flowing to “average Americans” but the reality is most of the money has flowed to the pockets of too big to fail banks for their global stock market speculation.

The insanity that has gone on with the bailouts as well is the fact that banks are charging absurd interest rates while borrowing at the Federal Reserve for close to zero percent:

The average credit card rate is over 13 percent while the Fed Funds rate hovers close to 0:

Now if American households are being put into debt rehab, why is the national debt increasing?  Much of the spending is happening for the top 1 percent of our country that are largely vested in the too big to fail institutions.  The working and middle class is being slowly dismantled while money flows to the top to protect the profits of the very few banks that control most of the assets in the United States.  Now that trillions of dollars have flowed to the top thanks to working and middle class taxpayers, these banks and the government are turning a blind eye to the public and shutting them out completely by taking away their plastic, kicking people out of homes, and offering a nice consolation of burger flipping jobs.

We are quickly reaching a point where if we do not get our financial house in order as a nation, the national economy might be facing something that is already being experienced by working and middle class Americans.  At some point globally the scissors will come out and cut our plastic.

My Budget360

Consumers have had enough of high interest rates on credit cards but its a case of one plastic for another. Bloomberg reports Cardholders Prefer Debit as Credit-Card Use Falls

Americans are shunning their credit cards and using debit to avoid incurring more debt, said Javelin Strategy & Research.

Total payment volume for debit cards surpassed credit-card volume for the first time in 2009 and will continue to eclipse it in 2010, according to a report released today by the Pleasanton, California-based market-research firm that specializes in financial services.

At San Francisco-based Visa Inc., the world’s biggest payments network, the total payment volume for debit cards increased by 7.9 percent in 2009 to $883 billion as credit-card volume declined by 7.3 percent to $764 billion. Volume for debit cards at No. 2 MasterCard Inc. in Purchase, New York, rose by 5.8 percent and 2.8 percent at No. 4 Riverwoods, Illinois-based Discover Financial Services.

Fifty-six percent of consumers said they had used a credit card in the past month compared with 87 percent who said they had in 2007, according to the study, which surveyed 3,294 people in November 2009 for that question. Other findings were based on data collected online from 5,211 respondents in March 2010 and 5,000 consumers in November 2009. If the rate of decline continues, 45 percent of consumers will reach for a credit card in 2010, the study said.

Long-Term Shift

Another cause for reduced credit-card use is financial reform aimed at protecting consumers, which has decreased the number of new cards given and cut available spending limits, the Javelin report said. Federal legislation that limits overdraft fees, caps on fees banks charge merchants for debit-card transactions and credit-card legislation mean banks have to recoup losses and are only giving cards to the most creditworthy borrowers, the study said.

Younger people also favor debit over credit because of the immediate nature of making a payment, which means the shift to debit will be long-term, said Van Dyke. And since younger cardholders favor the convenience of debit cards, they won’t turn to cash or checks, he said.

Purchase transactions generated by credit and debit cards in the U.S. totaled more than 27 billion from Jan. 1 through June 30, according to the Nilson Report, an industry newsletter in Carpinteria, California. Debit-card purchases accounted for 65 percent of all sales, up from 62.3 percent, the Nilson Report said.

Total Revolving Credit

Revolving Credit Percent Change From Year Ago

Reasons For Decline In Credit Usage

• Bankruptcies
• Other Loan Writeoffs
• Consumers Paying Down Debt
• Increasing Favoritism Towards Debit Cards
• Gift Cards
• Bank Lending Standards Increase

Unprecedented Drop in Revolving Credit

This is all part of an overall secular shift in consumer attitudes towards credit and debt, and bank attitudes towards lending. It’s a good thing but Bernanke will not see it that way.

Mike “Mish” Shedlock
http://globaleconomicanalysis.blogspot.com

During the past week there has been a flurry of Federal Reserve reports and commentary concerning the levels of credit in the current economy. The two most notable were:

On July 8th they reported that the level of seasonally adjusted outstanding U.S. Consumer Credit (their G.19 report) decreased during May by $9.1 billion, representing an annualized rate of credit contraction of 4.5%. Although even this change is above the average for the preceding twelve months, it is much smaller than a quiet revision to the previously published April U.S. Consumer Credit figure — which is now reported to have decreased by $14.9 billion (a 7.3% annualized contraction rate).

To put these numbers in perspective, consumer credit has contracted during 15 of the past 16 reported months, and is down a record total $148 billion over that time span. The $14.9 billion in credit ‘lost’ during just April is the second highest monthly amount in history, second only to the $23.4 billion ‘lost’ during November, 2009. And the nearly 6% cumulative reduction in consumer credit over the past 16 months is the largest (on a percentage basis) for any 16 month span since September 1944 — when FDR was still in the White House and people were buying War Bonds instead of tightly rationed consumer goods.

On July 12th Federal Reserve Chairman Ben Bernanke noted that small businesses were not getting the loans that they need to create new jobs. The Federal Reserve’s own data reports that lending to small businesses dropped to below $670 billion in Q1 2010, down about $40 billion from two years prior.

The New York Times reported Mr. Bernanke wondered: ‘How much of this reduction has been driven by weaker demand for loans from small businesses, how much by a deterioration in the financial condition of small businesses during the economic downturn, and how much by restricted credit availability? No doubt all three factors have played a role.’

What does this mean?

The reported credit contraction is real, at historic levels and on-going. Although the Federal Reserve does not yet know whether the most recent consumer credit contraction is the result of consumer pay-downs or credit company write-offs, the fact remains that consumer spending and the money supply are both being impacted negatively as consumers (one way or another) clean up their personal balance sheets.

Small businesses, which account for over 60% of gross job creation, are not – for whatever reason – tapping into the credit necessary to create those jobs.

On July 6th we reported that the nearly relentless decline in our ‘Daily Growth Index’ had leveled off, but cautioned that the index should be viewed from a longer perspective. Since then the decline has resumed:

(Click on chart for fuller resolution)

When the most recent period of contraction in our ‘Daily Growth Index’ (January 15, 2010 to date) is charted along with the similar ‘Daily Growth Index’ contraction events from 2006 and 2008 (with the first day of each contraction aligned on the left-hand axis) the relative severity of each contraction can be visualized.

(Click on chart for fuller resolution)

One measure of the true severity of an economic slowdown is the ‘area under the curve’ (or ‘above’ the curve in this case) swept out by the ‘Daily Growth Index’ over time. This area is just the average magnitude of the decline times the duration of the contraction event. During the 2006 slowdown this area was about 136 percentage-days of contraction, while the 2008 event was much more severe at 793 percentage-days. The 2010 event has now reached 288 percentage-days, over twice the severity of 2006 and well over a third of 2008 ‘Great Recession’ — and it is still growing.

The key point to notice in the above chart is that if the current 2010 curve continues its current course, in about 20 days the 2010 slowdown will be more severe on a day-to-day basis than the 2008 ‘Great Recession’ was at the same point in its respective evolution. Unless the economy begins to pick up quickly, a double dip is likely — with the second round milder but lingering longer than the first.

Note: A more complete list of historical Commentary can be found on our History Page

Consumer Metrics Institute

Consumer Credit: OUCH!

Posted by Karl Denninger

So much for the “expected” -500 million print:

Consumer credit decreased at an annual rate of 5-1/2 percent in February 2010.  Revolving credit decreased at an annual rate of 13 percent, and nonrevolving credit decreased at an annual rate of 1-1/2 percent.

As is my usual practice I’ve grabbed the data updates and put them into year/over/year graphical format, thereby removing the seasonal impacts.  Here we are!

No increase of materiality here in the second derivative (that is, households are still de-levering on the plastic side, and effectively flat on a non-revolving.) 

In the larger time-frame:

For those who argue that we are emerging from recession and that we are seeing real final demand increases, you have to square that against these charts.  It simply isn’t happening.  For a look at the contraction in dollar terms, the change is seen here:

That’s a $9.5 billion decrease in revolving (credit card) debt in one month (February) and a $2 billion non-revolving decrease.

While in the intermediate and longer term de-leveraging is good for the consumer, in the short term it throws cold water all over the improving final demand picture.

Here’s what’s going on folks – the so-called “increased consumer spending” is coming from people not paying their mortgages, blowing it on silly stuff like iPads instead, along with the government borrowing and spending.

That’s not positive for the consumer outlook (or profit outlook) at all, since that decision not to spend on mortgages (e.g. blowing off shelter costs) only works until the bank forecloses and you are forced to start paying rent somewhere.  Then that cost which formerly allowed you to go out to eat at Olive Garden every night comes back with vengeance.

Last month’s report was trumpeted as evidence that the consumer had turned the corner and was able to borrow and spend again, raising the possibility that the economy truly was turning and the government could start to cut back on the fire hose.

This report blows that argument to bits – we have a consumer that is tapped out with our GDP being supported only by massive borrow-and-spend at a federal level, aided and abetted by a massive stock market and credit bubble.

This is not going to end well.

Wait!  I thought we had a recovery?  Where are my green shoots?

Consumer Credit in U.S. Declined in November by Most on Record