Debunking The Great Myth Of US Consumer Deleveraging, Or Why The US Economy Will End Not With A Whim

[OhioChick]

Debunking The Great Myth Of US Consumer Deleveraging, Or Why The US Economy Will End Not With A Whimper But A Bang


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.

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:



More: http://www.zerohedge.com/article/debunking-great-myth-us-consumer-deleveraging-or-why-us-economy-will-end-not-whimper-bang

[ihavenobias]

1. K & R. Of course the decline/stagnation of wages largely led to the need for so much credit.

I know plenty of people who didn't use/aren't using credit cards for luxury items.

[Demeter]

2. Different People Do Different Things

But the net result is that the credit-driven economy is kaput. And so far, nothing else has come along to replace it.