Saturday, December 13, 2008

Barrons: The consumer is reducing his debt?!?!?

Look at this snippet in this weekend's Barrons:

Adjusted for inflation, household net worth has collapsed by 15.3% from its year-earlier level, surpassing the 10.9% plunge in the dot-com bust in 2001 and the 13.8% drop in the 1974 bear market, says Michael T. Darda, chief economist at MKM Partners. In real dollars, the $10.2 trillion loss "dwarfs the supposed 'savings' from lower gasoline prices," he adds.

With the record real loss in wealth has come a record nominal decline in retail sales. In the 12 months ended November, they're down 7.4%, according to International Strategy & Investment. ISI estimates that household net worth fell at an 18% annual rate in the current quarter and, in total, probably sliced 1.5% from this year's gross domestic product.

As the value of their assets shriveled, Americans did something they've never done, at least since records started in 1952; they actually reduced their debt. Household borrowing, mortgage and consumer credit combined declined at a $117.4 billion annual rate in the third quarter.

Only a financial magazine would say that the consumer is reducing their debt, as if we have now become a nation of savers. They have defaulted on their debt! They have defaulted on mortgage debt, auto debt, credit card debt, personal debt, and any other debt that they have, and those who have defaulted on their debt obviously cannot get credit, but that is the tradeoff that they are "happy/forced" to live with. The consumer lost their savings in the stock market and they've lost their equity in their homes. So they'll start over, but they are surely not going to work to pay off their credit!

Debt has been reduced out of necessity, but the reduction has been through default. And that's why the Fed is furiously attempting to print money. The only way to expand debt is through loans, and in a deflationary environment, credit doesn't expand. And our banking system, depends on the creation of debt, for the multiplier affect to create money via fractional reserve lending.

The "ponzi system" of banking, needs credit to function. So Treasury and our Federal Reserve and Central Banks around the world are desperately lowering rates as an inducement for the consumer to borrow.

You can either marginalize debt or monetize it. You can marginalize debt by good paying jobs, and since those aren't available rates are being lowered to marginalize mortgage debt. (What have lenders done with credit card debt? They have become more restrictive, raised rates, and increased payment mimimums. So this debt is being monetized by default. Does anybody know a credit card company that has been lowering rates?) The monetization of debt comes from default, or with the modification of mortgages. How many mortgages have been modified whereby the debt has been forgiven? Does anybody know anyone that has gotten their principal reduced on a home loan? So debt is monetized by default.

So to say that the consumer is reducing their debt, is like saying you are heating your home with your furniture that you have thrown in the wood burning stove.

And only on Wall Street would that be a good thing!

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