Friday, January 15, 2010

The Consumer Deleveraging Myth

Meredith Whitney, touts that line, but when 15% of homes are behind in payments or in foreclosure, do you think those people are out getting new credit cards?

Debit transactions make up almost 59% of all plastic activity anyway. So the Atlantic has a different spin on the deleveraging myth:

Pundits and analysts have recently celebrated yet another reduction in U.S. consumer debt as a sign that we're in full-on recovery mode and the worst is behind us. Last week the Federal Reserve released data on consumer credit through November 2009. I checked out the data myself and found that all that consumer deleveraging we're hearing about is a big fat myth.

The above chart (Click it! It gets bigger!) shows both the total amount and monthly percent change in both revolving and non-revolving consumer credit from 2000 through 2009, the most recently available datapoint. Let's look at revolving and non-revolving credit:

--Revolving credit peaked in August 2008. It's down 10% in the last year, but up a whopping 42% over the last decade.

--Non-revolving credit (student, boat, and other loans not secured by real estate) peaked in January, 2009, and has only decreased 1% since. Since January 2000, non-revolving debt increased a whopping 72%. On a per-capita basis, from the end of 2001 through 2009, outstanding household revolving credit increased almost 18%, while non-revolving credit outstanding increased almost 42%.

Contrary to the claims of several notable pundits, there was no "Great Consumer Deleveraging" in 2009, nor was there one in 2008. After peaking in mid-2008, mortgage debt decreased only 1.8% through the third quarter of this year. With unemployment sticking around 10 percent and benefits ending for many recipients, I see delinquencies and defaults continuing to rise throughout the year, which I believe is corroborated by historical FDIC data.

We often hear the statistic that "consumer spending makes up 70% of GDP." But we don't often hear the logical follow-up question, "Why is that a good thing?" When growth in consumer spending is funded with debt rather than rising increased incomes, collapse is inevitable.

Meredith Whitney, who promised the world would collapse because the consumer's credit lines would be cut, said on March 22, 2009 in an interview, when she should of figured this whole thing out, said this in that interview:

“The funny thing is, in your twenties you try and look serious, and after your twenties, you just try and look hot,” she jokes. “I’m not an old white dude, so I stick out.”

Oh. Now we see the secret to her non-success since the 666 bottom!

She's primping in the mirror, instead of pimping what's happening!

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