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The Us Consumer Is Falling Out Of Love With Debt! Hoorah!

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Consumers Cut Back on Debt For the Fifth Straight Month

Published: Friday, 7 Aug 2009 | 3:18 PM ET Text Size By: AP and Reuters

The Federal Reserve says consumers paid down their credit cards and reduced other debt in June for the fifth straight month as they rebuild savings battered by the recession.

The Fed says Americans cut their outstanding consumer debt by $10.3 billion, or 4.9 percent, to $2.5 trillion in June.

The cut is much steeper than the $4.7 billion analysts expected and larger than the $5.4 billion drop in May. :)

Non-revolving credit, which includes closed-end loans for big-ticket items like cars, boats, college education and holidays, fell $5.04 billion, or at a 3.8 percent annual rate, to $1.59 trillion.

Revolving credit, made up of credit and charge cards, dropped $5.25 billion, or at 6.8 percent rate, to $917 billion.

Rising unemployment, declining home values and reduced stock portfolios have spurred Americans to spend less and save more.

That could slow any economic recovery, as consumer spending accounts for 70 percent of economic activity.

http://www.cnbc.com/id/32333755

This is the best news I have seen all week! :D

Looks like the consumer isn't playing ball.

The banksters will be shitting themselves at these reports.

Are the people finally waking up to the fact that debt is bad?

Edited by MOP

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For a economy driven by debt expansion this is like someone letting off a nuke.

If people don't work they can't borrow, if they fear losing there job they won't borrow and will pay down debts. If you want something you save the good old fashioned way.

Will demand drop off a cliff?

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http://www.cnbc.com/id/32333755

This is the best news I have seen all week! :D

Looks like the consumer isn't playing ball.

The banksters will be shitting themselves at these reports.

Are the people finally waking up to the fact that debt is bad?

I wish I could share your optimism MOP. In any sane world this would be a good thing.

Instead this will probably be interpreted as a signal that more printing is required. Can't have the money supply falling, can we?

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Denninger doesn't hang about, he's put this up:

Consumer Deleveraging Continues

The Market TickerFriday, August 7. 2009

Posted by Karl Denninger in Consumer at 15:29

For those who say that the consumer has "de-levered" enough, and thus we will return to prosperity and borrowing, The Fed threw a big bucket of cold water on that:

Consumer credit decreased at an annual rate of 5-1/4 percent in the second quarter. Revolving credit decreased at an annual rate of 8-1/4 percent, and nonrevolving credit decreased at an annual rate of 3-1/2 percent. In June, consumer credit decreased at an annual rate of 5 percent.

Or if you prefer it in pictures, here it is:

2009-08-07Credit.serendipityThumb.png

Note that revolving credit is being defaulted and paid down (probably much of the former!) much faster than non-revolving. Here's the breakdown:

revolving.serendipityThumb.png

non-revolving.serendipityThumb.png

So much for the argument that "The Consumer is fine" and will "return to spending like a drunken sailor."

Uh, what will he spend when he is paying down debt while income, as reported by personal earnings, continues to contract or be flat?

http://market-ticker.org/archives/1312-Con...-Continues.html

Edited by MOP

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$10.3bn is only 4.9% of 200 odd Bn not 2.5 Trillion.

Or in other words, its got the decimal in the wrong place and is more like 0.5%

Never mind that, look at the nice pictures above. That's proper bear food right there! :D

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Suggests to me that US consumer sentiment is still on the down side.

Not only that, it's actually accelerating! This is the back-to-school shopping season in the US.

"Set the printers to warp speed Mr Bernanke!"

Edited by MOP

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$10.3bn is only 4.9% of 200 odd Bn not 2.5 Trillion.

Or in other words, its got the decimal in the wrong place and is more like 0.5%

That's 5% of consumer debt, not of total debt.

5% in a month is impressive, and shows there's still a very great deal of disposable money sloshing around their economy. Another year and we'll have the nouveau debt-free.

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That's 5% of consumer debt, not of total debt.

5% in a month is impressive, and shows there's still a very great deal of disposable money sloshing around their economy. Another year and we'll have the nouveau debt-free.

It confirms what I expected, the Fed can print as much money as they want but they cannot force people to

borrow and spend it.

Not when people are worried about losing their jobs are up to their eyeballs in debt and taking wage cuts.

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$10.3bn is only 4.9% of 200 odd Bn not 2.5 Trillion.

Or in other words, its got the decimal in the wrong place and is more like 0.5%

The OP quote is wrong; it's 4.9% at an annual rate - 10.3 x12 = 124=4.9% of 2.5Tr.

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Does anyone have any sense as to whether these reductiosn represent earned income used to repay debt or whether it simply represents write offs on the banks' income statements and balance sheets?

Depending on how the debts are measured, the reductions could simply reflect defaults.

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Then it reveals QE for the useless thievery it is

Lenders will charge an interest rate appropriate to the default risk of the borrower. QE doesn't reduce that risk.

Borrowers will borrow if they can afford the interest rate charged by the lender, have job security and are inclined to consume luxuries. QE doesn't affect that

And QE doesn't affect defaults either

It simply raises inflation expectations and gives banks risk-free profit

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The other aspect to this is the lack of alternatives.

There were a lot of (previously?) high net worth people who used to borrow against their houses and invest the proceeds elsewhere because they thought that their asset returns would outwiegh the cost of their mortgages.

The flaw that we have seen with QE in Japan is that people are unwilling to borrow if they do not see any assets that are likely to earn a return larger than the cost of debt.

Even if rates are zero, people won't borrow if their best use of the funds will return -5%.

This is the death spiral that deflation can cause. The supply of credit has no impact if there is no demand for credit.

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Like luckyone, I suspect it is more to do with lenders than borrowers.

If they tighten their criteria, lending falls.

I'm not so sure about that.

Why the big jump in July? Has lending got significantly tighter since May?

Edited by MOP

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The other aspect to this is the lack of alternatives.

There were a lot of (previously?) high net worth people who used to borrow against their houses and invest the proceeds elsewhere because they thought that their asset returns would outwiegh the cost of their mortgages.

The flaw that we have seen with QE in Japan is that people are unwilling to borrow if they do not see any assets that are likely to earn a return larger than the cost of debt.

Even if rates are zero, people won't borrow if their best use of the funds will return -5%.

This is the death spiral that deflation can cause. The supply of credit has no impact if there is no demand for credit.

I sometimes wonder if QE is nothing more than a bandage to hold the system together while it deflates. Perhaps the important thing about Japan during the "lost decade" is that the deflation was so slow that society held together.

I can see QE becoming a semi-permanent arrangement here and in the US.

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Debt is good. It keeps people working and paying taxes to feed the superstate.

Joanthan Ross says thankyou for your debt addiction.

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http://www.cnbc.com/id/32333755

This is the best news I have seen all week! :D

Looks like the consumer isn't playing ball.

The banksters will be shitting themselves at these reports.

Are the people finally waking up to the fact that debt is bad?

Looks like a Japanese style "balance sheet recession" then... as Richard Koo called it. The essence of which is not so much that banks become more reluctant to lend to increasingly credit-unworthy consumers, but that consumers become more reluctant to borrow. The media, cornered by the economists, completely neglects the breakdown in consumer psychology involved here, and takes a mechanistic view of the economy.

All we gotta do is prime it and kick start it with a bit more QE!! :lol:

Richard Koo

http://media.csis.org/er/090326_koo.mp3

[previously posted by tbbeta]

Edited by roman holiday

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dont worry still plenty of room to go, true utopian wealth wont be reached until it goes asymptotic against the vertical

Things seem to always fall apart when the world requires exponential functions to keep going rather than simple linear functions.

QE and fiscal stimulus are raising the stakes where we need parabolic rather than linear functions to survive.

Things will end in tears.

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