Consumer Credit Drops Record $17.5 Billion; Steepest Declines Since WWII

[girl gone mad]

Consumer Credit Drops Record $17.5 Billion; Steepest Declines Since WWII
http://globaleconomicanalysis.blogspot.com/2010/01/consumer-credit-drops-record-175.html">Global Economic Analysis

While monetarist clowns focus on so-called excess reserves and the huge surge in inflation that is supposed to bring (See Fictional Reserve Lending And The Myth Of Excess Reserves) I am watching the biggest plunge in consumer credit since WWII.

Please consider http://www.bloomberg.com/apps/news?pid=newsarchive&sid=amJlW8LcoeBU">Consumer Credit in U.S. Drops Record $17.5 Billion.

Consumer credit in the U.S. dropped a record $17.5 billion in November as unemployment close to a 26- year high discouraged borrowing and banks limited access to loans.

The slump in credit to $2.46 trillion was more than anticipated and followed a revised $4.2 billion drop in October, Federal Reserve figures showed today in Washington. The median estimate of economists surveyed by Bloomberg News projected a decrease of $5 billion. The series of 10 straight declines was the longest since record-keeping began in 1943.

“Double-digit unemployment is eroding consumer confidence and the uncertainty is prompting consumers to pay down their credit card debts,” said Chris Rupkey, chief financial economist at Bank of Tokyo-Mitsubishi UFJ Ltd. in New York. “We have not seen such a wholesale reduction in consumer credit since the last time we had double-digit unemployment rate following the early ‘80s recessions.”

Revolving debt, such as credit cards, plunged by a record $13.7 billion in November, the Fed’s statistics showed. Non-revolving debt, including loans for autos and mobile homes, declined by $3.8 billion. The Fed’s report doesn’t cover borrowing secured by real estate

Total Consumer Credit

http://4.bp.blogspot.com/_nSTO-vZpSgc/S0e1sYih3BI/AAAAAAAAHlM/uyO3jBhXfqE/s400/Total+Consumer+Credit.png


http://globaleconomicanalysis.blogspot.com/2010/01/consumer-credit-drops-record-175.html">more...

[dkf]

1. That is a very scary chart. The huge upswing I mean.

What is the goal? To have that chart go up in perpetuity or to bring it down?

My sometime SO was debating me that living on credit (aka leveraging) is the American way of life and is the only way to a decent standard of living. I'm the opposite. I think declining credit use Is a good trend. He is horrified.

I guess the question is what amount is voluntary ie people don't want to use credit cards and what is forced ie banks shut down their access. This would be a better indicator to me of a healthy trend or not.

[truedelphi]

3. I think that if it is about the individual holding back on

Credit, it may be a good thing.

But if you are talking about the type of credit that used to exist, that helped small and mid-sized businesses get on their feet and stay on their feet, then the reduction in credit is a bad thing.

I am not sure which aspect(s) of credit this graph is referring to.

[FBaggins]

7. Don't let it scare you... it should be logarithmic

The story is still valid. The decline in this type of credit is comparatively rare (though it may be a good thing at this time), but the seemingly unsustainable curve toward infinity is a byproduct of how the data was graphed.

[DeschutesRiver]

11. We didn't live on massive leverage and are fairly frugal

So I also think the declining credit trend is a good thing. Because we didn't go uber crazy over credit, right now we don't owe anyone anything and aren't as freaked out about the economy personally as some people are. We did have a brief foray into credit when we first started out, but at some point, I decided I didn't like not sleeping very well at night knowing that some of the things I "owned" and considered my property actually still belonged to strangers (creditors). If it wasn't for me, dh would have been far more comfortable using credit more freely over the years. But I prevailed.

One point he makes whenever he and I debate it, is the example of his older brother (by 15 years). That man massively leveraged even back when leverage wasn't so "in". But just like currently happening, he got to the point where his giant ponzi scheme of credit was collapsing because he couldn't make all the payments that he had obligated himself to make (he made very good money; he just used far more of other people's money than his income could have ever paid back in a timely fashion).

However, he died at age 58 and escaped paying back much of it. DH says, well, in his case (if you don't consider how the people he stiffed had to suffer the losses), he was able to live a very lavish lifestyle due to his credit habits, including a small plane, boats, vacations, the best meals and clothes, etc, and since he was destined to have a shortened life, never had to pay a price for having used credit this heavily. Had he not done that, he would not have lived long enough to buy those things on more of a cash basis, and then had enough life left to enjoy the fruits of his labor.

I call bullshit because his brother was an unhappy man quite a bit of the time due to leverage issues, and it was a sucky miserable "trying to keep up with and beyond the Jones" kind of existence while he was living. Besides that, there is no way to know which side of the death curve you will end up on. I don't think the trade off is worth it. There is nothing wrong with the whole idea of credit; but what I'm seeing now are the results of credit abuse and misuse, and that bites.

[Democrats_win]

2. Notice the horizontal section in 1990. Graph shows Americans need help.

In 1990, when George H.W. Bush was president, there was a recession and people really cut back on their credit cards. Many felt the pinch and were determined to stop using credit cards. But then notice how the graph continued its exponential growth after that. People really have trouble controlling their borrowing.

[whattheidonot]

5. who to blame?

It is easy to cast blame on the left or right for this mess. It is a many headed monster. One thing for sure is that the economy , which is tied to every facet of a society is not working. Hence the society is not working, literally. When a modern industrial society does not work, it is bound to fall apart. The whole system is tied to financial income. Once people do not have sufficient income they will turn to all means available to get income. The middle class is dwindling.Banks can't get money. Business have no use for it. Not enough people have money. There is all sorts of money out there making the dollar weak. Who has the money? What is going on? Exports will go up, so will gas, food, rent, leaving the people without money without money. So businesses that do not export will be screwed because there will be no money for them. If we start exporting everything and ride a bus to shop at Walmart we might have a shot. Things are so ridiculous people now grocery shop all day to find deals. Never mind the time involved. Maybe that is a good thing? When you are not making much and the dollar is weak, that is good time to think about making some more valuable dollars. Set up shop at home, provide goods and services, and take cash and goods as payment. This how the Cubans once conquered Miami.

[roamer65]

4. The M1 monetary inflation hasn't gained traction yet.

When the banks start loaning this "hot" money, inflation will start in earnest. Remember that under fractional banking, the capital reserves (aka extra M1 hot money) can be 9x multiplied on loans.

We're just a mood change away from severe inflation.

[JohnWxy]

6. great news. Too bad Bloomberg quoted absolute numbers but not percentages

Revolving debt, such as credit cards, plunged by a record $13.7 billion in November, the Fed’s statistics showed. Non- revolving debt, including loans for autos and mobile homes, declined by $3.8 billion.

http://www.federalreserve.gov/releases/g19/Current/

revolving debt down 18.5%
non revolving down 2.9%


people are doing just what they should.

[girl gone mad]

12. Yes, very good for people in the long run..

short term it will be tough on many businesses. However, it's not the responsibility of individuals to take on more debt in order to save the economy, contrary to Bush's advice to everyone to "go shopping" after 9/11.

[JohnWxy]

13. I'm not arguing that people should take on debt to save the economy.

"However, it's not the responsibility of individuals to take on more debt in order to save the economy.."

People are cutting the worst kind of debt, unsecured debt is the most expensive. Of course they are doing this because we're in the REPUBLICAN DYSTOPIA - i.e. the Second Great Depression. It doesn't look quite so bad because of steps taken by Obama. But without those actions we would be talking about 20% unemployment instead of 10%.

[Statistical]

14. Agreed.

We can no longer revolve debt continually.

Nothing wrong with debt per say. Mortgages allow more people to buy a home. Auto loans allow people to get car earlier.

However debt should be something used for specific reason and paid down. It shouldn't be used to support a non-existent lifestyle (spending $55K a year on $50K income).

Now as recession ends if we could see govt debt drop also it would be even better.


Good indicator is total debt (consumer debt + mortgage debt + business debt + state govt debt + federal debt).

[golfguru]

8. I am contributing to that decline

Mastercard just ripped me off big time. My computer crashed the day before I was
scheduled to pay my credit card bill on-line, and then I was 6 hours late in paying.

Guess what! They charged me $39 late fee and $9.75 interest for the month on a balance
of aprox $300.

Guess what! I just cancelled their card.

[AnneD]

9. Good on ya mate!!!!!

We have been CC free for 7 years and yes it can be done. We have become the richer for it.

[Warpy]

10. That's 17% of a 550% increase over 30 years

The run down is looking to be steeper than the run up, and that is the most alarming thing right now.

It means people are just not spending since their wages are certainly not adequate to support the consumer economy. It also means there is a dearth of seed money to get new enterprise going.

It's a double whammy. The only way out of it is through it, I'm afraid. We have reached unacceptable debt loads and those need to be paid down. The economy will not rebound until that is complete and wages have risen enough to support a new economy.

[Statistical]

15. One thing I would like to see is higher minimum payments.

Not right now the economy is too weak, too many people are hurting.

However credit card reform part 2 in a couple years should concentrate on:
1) hard caps on fees
2) limits on interest rates
3) substantially boosting min payment.

IMHO minimum payment should be 3% of balance (or minimum of $25) PLUS interest and fees.
Now at 12% APR that 1% a month so it is 3% principle paid down + 1% in fees. that is about double current min payments.
Even with 3%+fees it will take about 7 to 8 years to pay down a large balance.

4) Change statement. Should exactly how min payment is calculated, how long it will take to repay cc, and how much interest that will accrue. Also show two alternate payment amounts (faster repayment w/ reduces interest charges).