The Fog of Economic Crisis - Part I: Will the real Real Economy please stand up - Eric Janszen

[jneal3]

Re: The Fog of Economic Crisis - Part I: Will the real Real Economy please stand up - Eric Janszen

Surely some portion of our national interest payments has utility in this way.

I would think that if it were a significant portion, it would have stayed relatively constant over time, instead of having increased exponentially.

btw if thrifty is boring, I think we're finding out as a nation that we and our children/grandchildren can't afford 'excitement' :rolleyes:

[thriftyandboringinohio]

Re: One Explanation for Eric's Graphs

If I understand this correctly, Joe Consumer uses his credit card as an convenience, one card does it all. He pays off his credit card every month in full, and therefore gets free line of credit from the banks.

Then, all of a sudden, the economy takes a shit. Joe cuts back some on his purchases, but still needs gasoline, food, car payments, etc. His overtime disappears, then he is on a short work week, then laid off. Bank balance tanks, so even more is purchased on credit card. Thank God he had received all those credit cards with $10k credit limits, and the banks $250k line of credit that pretends to be a mortgage. Just write the cheque says the bank, and we'll add it to the principal on your mortgage. If times get better, then Joe has nothing to worry about. If things don't get better soon, again, Joe can't do much else about it, so why worry about it; it's only money, and a guy has to eat.

All of this will show as a dramatic rise in sales & income to the banks and the credit card companies.

So, let's take a vote. Does this scenario explain the above graphs adequately?

Question: Eric, can we back out these imputed interest charges from the Gross Expenditures to see what the true retail sales are without the interest surcharges? That should indicate just how lively the consumers truly are.

It's a great scenario, but doesn't seem right. The lower 90th percentile of people have been famously over-leveraged and underemployed for quite a while. I wouldn't think there would be enough credit left available to that cohort to pay the interest streams shown; not that much money for that long a time, and increasing sharply. Joe consumer entered this mess with his credit card, auto and home equity lines maxxed out and now he's out of work.

Could it all be coming from the upper income folks, the top 10 percentile, paying down debt?

I don't question the data but remain confused about who could be paying all this interest, more all the time.

[jneal3]

Re: One Explanation for Eric's Graphs

Question: Eric, can we back out these imputed interest charges from the Gross Expenditures to see what the true retail sales are without the interest surcharges? That should indicate just how lively the consumers truly are.

Isn't that chart already shown in EJ's piece as:

The year over year data that compare Dec. 2009 to Dec. 2008 shows a sharp recovery.

You may wonder how a 5.3% monthly decline in Retail Sales, from $376 billion in Jun. 2008 to $356 billion in Dec. 2008, translated into 20,000 store closings.

This is why I asked a question above (post #21) - to me, this chart shows that the consumer is getting 'lively', independent of the thesis that it's all FIRE-driven. It looks like the PCE chart EJ showed, a small dip then recovery, and at a slight phase lag. If it follows the PCE chart, we would see a full recovery to pre-crash levels sometime fairly soon. Unless of course I'm just being thick.

[c1ue]

Re: The Fog of Economic Crisis - Part I: Will the real Real Economy please stand up - Eric Janszen

There may be a counter argument for this. My car takes me back and forth to work every day. My little one-man business has one customer and the business generates revenue reported on a W-2. My auto is a vital piece of capital equipment taking me to the work site every day. That's economic activity. Of course mine is old and long paid off (thrifty and boring), but if it had a loan I would consider the interest a fair cost for a contributing asset.

Surely some portion of our national interest payments has utility in this way.

Certainly correct, but I'd note that there is a difference between capital cost and interest cost.

In your own personal example, you have paid off your car. There is no interest expense, but there is still capital expense (depreciation).

The business would generate revenue regardless of the existence of the interest expense; it might be worthwhile nonetheless but it should not be a requirement.

The vast majority of auto loans, however, are effectively leases.

Many, if not most, people do not keep their cars for the full 5 or 7 year loan terms; as they sell or trade-in the old car and buy a new one every 2 or 3 years - the difference between a loan an a depreciating asset becomes apparent to the tune of several thousand dollars.

In this case, the economic value generated by having the loan is net negative - especially so if compared to an outright lease.

[Me]

Re: The Fog of Economic Crisis - Part I: Will the real Real Economy please stand up - Eric Janszen

So does this mean the FIRE economy is here to stay?

From what I can figure out the answer is yes. My question is rather. Does this put us in a deflationary outcome?

[thriftyandboringinohio]

Re: The Fog of Economic Crisis - Part I: Will the real Real Economy please stand up - Eric Janszen

bottom line... economy crashes & services pce never falls? wtf?

answer... gov't money mainlined into the veins of the fire econ.

I’m not doubting your conclusion MM, I'm just genuinely thick sometimes. By what mechanism(s) did the Fed/treasury mainline all this interest into PCE?

[porter]

Re: The Fog of Economic Crisis - Part I: Will the real Real Economy please stand up - Eric Janszen

Our earlier report of the death of the FIRE Economy was wildly exaggerated. PCE increased even during The Great Recession because the so-called Services component—that makes up 67% of the measure—grew due to interest and fees on existing debt.

How does this jive with the massive decline in revolving credit? How can you justify this conclusion without comparing the magnitude of the increase in fees and interest versus the decline in revolving credit? Where would we even get this data?

As someone who works at a commercial bank I can speak to what we are seeing. We don't do any consumer loans (no autos, credit cards, etc.), but only business lines of credit, equipment loans, construction loans, mini-perms, acquisition & development, etc. So, this may be different that what consumers are experiencing. However, we are generally freezing lines of credit for Borrowers who don't have sufficient cash flow or collateral value. Additionally we have implemented rate floors on virtually everything at 6%, with the exception of problem loans (in which case we actually are lowering rates to help with debt service). Even with these rate floors, we are pretty much holding steady on rates (no dramatic change over the past few years), but we are reducing our commitments and doing very few new loans. Given this experience, it doesn't seem to jive with the above analysis.

But, like I said, we don't really do consumer loans, so I realize this might be a different experience. However, from personal experience my credit card rates are still low and I haven't been charged any new fees. Also, residential mortgages still have very low rates and most folks I talk to are actually negotiating lower rates on their home loans (some have even told me they are short-selling their homes to their wives and locking in lower rates at the same time). In general people are spending less, borrowing less, paying off existing debt and negotiating better rates/deals on existing loans.

Again, I realize this is anectodal, so I will restate my questions above: How does this jive with the massive decline in revolving credit? How can you justify this conclusion without comparing the magnitude of the increase in fees and interest versus the decline in revolving credit? Where would we even get this data?

[bart]

Re: One Explanation for Eric's Graphs

This is why I asked a question above (post #21) - to me, this chart shows that the consumer is getting 'lively', independent of the thesis that it's all FIRE-driven. It looks like the PCE chart EJ showed, a small dip then recovery, and at a slight phase lag. If it follows the PCE chart, we would see a full recovery to pre-crash levels sometime fairly soon. Unless of course I'm just being thick.

Keep in mind that the retail sales stats aren't inflation adjusted. Here's a chart with both CPI and CPI w/o lies adjustments.





And the same chart, except log based.

[c1ue]

Re: The Fog of Economic Crisis - Part I: Will the real Real Economy please stand up - Eric Janszen

How does this jive with the massive decline in revolving credit? How can you justify this conclusion without comparing the magnitude of the increase in fees and interest versus the decline in revolving credit? Where would we even get this data?

Can't provide you with proof, but I can provide a possibly illuminating anecdote:

Last year I interviewed a lady as a caregiver - very nice person. What was interesting was that I was interviewing her for a $10/hour job, but in the interview process somehow her credit cards came up.

Turns out she was really desperate for work because her $25000 credit line was recently cut. She's been a professional caregiver for at least 5 years, so her income clearly did not match her credit limit. But it turns out the credit line originally arose because she did a stint for a while (15 years ago) as a purchaser for a small company.

I think what is happening is that the banks are cutting down on all the unwarranted credit lines to those borrowers which previously the bank hadn't cared about because before the economy was growing, other credit card companies would dangle refi deals, or whatever.

Those with good incomes won't see any effect, but almost by definition the majority of people don't have good incomes - at least commensurate with the amount of credit available.

Or in other words, the FIRE parasites are now performing triage on potential hosts.

[we_are_toast]

Re: The Fog of Economic Crisis - Part I: Will the real Real Economy please stand up - Eric Janszen

Again, I realize this is anectodal, so I will restate my questions above: How does this jive with the massive decline in revolving credit? How can you justify this conclusion without comparing the magnitude of the increase in fees and interest versus the decline in revolving credit? Where would we even get this data?

Consumer credit falls in November for record 11th month, as Americans pay down credit cards

...By contrast, November's revised $21.8 billion drop in total credit was the biggest amount in dollars terms since records began in 1943.

The Fed's credit report excludes home loans and home equity mortgages, only covering borrowing that is not secured by real estate.

The drop in overall credit for 11 straight months was a record in terms of consecutive declines, surpassing the old mark of seven straight declines set in 1943 and again in 1991.

Borrowing in the category that includes credit cards has fallen for 15 straight months, also a record.

With the string of declines, overall consumer borrowing by the Fed measure has fallen to $2.46 trillion.

With all the defaults on Mortgages, the total interest and fees on mortgages has to have fallen greatly.

Something is not adding up with attributing the increase in PCE to interest and fees from the FIRE economy.:confused:

[c1ue]

Re: The Fog of Economic Crisis - Part I: Will the real Real Economy please stand up - Eric Janszen

With all the defaults on Mortgages, the total interest and fees on mortgages has to have fallen greatly.

Something is not adding up with attributing the increase in PCE to interest and fees from the FIRE economy.:confused:

Not necessarily.

With Mark to Fantasy, all of the defaults can still be officially earning income for the banks - mortgage, credit card, or otherwise.

Perhaps being accelerated by the addition of late fees and penalties.

[jackboogie]

Re: The Fog of Economic Crisis - Part I: Will the real Real Economy please stand up - Eric Janszen

By pure chance, yesterday, as I waited in line at a bank branch here in the UK I chanced to overhear an agitated customer, (standing right in front of me), asking why his account was suddenly £450 overdrawn when he thought he had covered the last balance only to be told, (we could all hear this), that the last payment came in after the bank had computed an additional £5 per day on overdraft charges, which left the overdraft in place and adding daily. The customer was clearly disabled and totally confused by the actions the bank had taken against him.

Banks make a fortune from their most vulnerable clients.

Frontline just had a documentary that centered on this very theme. There is no money to be made from the financially prudent when it comes to credit cards. There is a nice little piece in there on the techniques that are used to increase the likelihood of overdrafts.

http://www.pbs.org/wgbh/pages/frontl...ource=proglist

[flintlock]

Re: The Fog of Economic Crisis - Part I: Will the real Real Economy please stand up - Eric Janszen

Not necessarily.

With Mark to Fantasy, all of the defaults can still be officially earning income for the banks - mortgage, credit card, or otherwise.

Perhaps being accelerated by the addition of late fees and penalties.

You beat me to it. I was going to say, its not on a cash basis that they count it.

[Bruno T]

Re: The Fog of Economic Crisis - Part I: Will the real Real Economy please stand up - Eric Janszen

If I'm not mistaken that PCE number includes loan PAYMENTS, so maybe it's a function of people stopping borrowing and paying down debt. Basically, even if you can't keep spending with your credit card, you still have to make the payments on it. Also, many have raised their rates dramatically, so even minium payment folks would be paying more.

Ok, if PCE is rising due to services,



This implies PCE is rising due to interest and fees paid to the fire economy.

But, I'm a bit confused.


Total revolving credit has dropped.



Total nonrevolving credit has dropped a little.



Total outstanding consumer credit continues to drop.

If the rise in PCE is to be explained by increasing interest and fees to the FIRE economy, how can this be when consumer credit has dropped and seems to continue to drop? It would seem to require a huge increase in interest or fees on existing loans.

The only thing I can think of is ARMS are beginning to reset, but even this doesn't seem to be large enough to make up the gap.

[tsetsefly]

Re: The Fog of Economic Crisis - Part I: Will the real Real Economy please stand up - Eric Janszen

anyone have a link of the NPR interview he was talking about?