Biggest consumer borrowing decline in 65 years

[LargoWinch]

No credit, no banks, no jobs: no borrowing. -W.


Consumer borrowing plunges by $7.94 billion in November, record amount in dollar terms

Martin Crutsinger, AP Economics Writer
Thursday January 8, 2009, 3:41 pm EST

WASHINGTON (AP) -- Consumers cut back on their borrowing by a record amount in dollar terms in November, another sign of trouble for the rapidly weakening economy.


The Federal Reserve reported Thursday that borrowing on credit cards, and for such things as auto loans, dropped at an annual rate of $7.94 billion in November, the biggest decline in 65 years of record keeping. That also was much larger than the $500 million decline economists expected, and left total consumer credit outstanding at $2.57 trillion.


continued here:
http://finance.yahoo.com/news/Consum...-14007650.html

[Starving Steve]

Re: Biggest consumer borrowing decline in 65 years

Why is paying cash for things and saving for things a worry to economists? (And what business is this of economists, anyway?) Why is the conversion of an economy to cash-and-carry a bad thing? Why is Bernankee fixated on making heretofore over-extended consumers (baby-boomers) borrow still more, when they should now be saving for their retirement needs?

Maybe the governments and their central bankers need to leave people alone and let the markets work. There is no fundamental error that world markets and central bankers are making when people choose to save rather than spend.

[c1ue]

Re: Biggest consumer borrowing decline in 65 years

This is interesting - one theory (Setser I believe) has it that the 8% deficit in 2008 (5% currency account, 3% fiscal) was financed by foreign inflows, but that this deficit will be at least 12% (i.e. pre Obama stimulus) in 2009.

Even discounting the likelihood that trade surplus based CB mopping up will be lower in 2009 (less dollars incoming, less CB need for sterilization via Treasury buying), the 2009 cash flow will need to find another 4%+ of new money.

If the foreigners don't do it - and there isn't much sign so far of this due to the rest of world's own financial problems, then the American people will have to.

This means going from -2% savings rate to +4% savings rate - pretty much a sudden stop with regards to consumption and by proxy the overall American economy.

Maybe that's the real plan: force Americans to save money via starvation of credit

See, the government really is there to help us! :eek:

[due_indigence]

Re: Biggest consumer borrowing decline in 65 years

I question the premise of the article. 'Cut back' implies an autonomous decision on the part of the consumer. I read a few weeks back a letter from the GM California Car Dealers Association (or something like that) addressed to GMAC demanding that the latter resume lending to its dealer network. I read somewhere else that 70% of all car purchases in the US are credit-based. Obviously this is one instance among many of curtailed credit. Thus consumer cut-back is probably in some measure 'consumer-led' i.e. due to belt-tightening and job apprehension. But it must also be influenced by lack of credit availability.

Maybe in the end the general economy doesn't care as the effect on economic activity is largely the same.

[Sapiens]

Re: Biggest consumer borrowing decline in 65 years

Why is paying cash for things and saving for things a worry to economists? (And what business is this of economists, anyway?) Why is the conversion of an economy to cash-and-carry a bad thing? Why is Bernankee fixated on making heretofore over-extended consumers (baby-boomers) borrow still more, when they should now be saving for their retirement needs?

Because debt is cash, and their jobs depend on the herd being compliant.

Maybe the governments and their central bankers need to leave people alone and let the markets work. There is no fundamental error that world markets and central bankers are making when people choose to save rather than spend.

These parasites are hard to eliminate.

Don't worry, once Obama takes hold and starts taxing to the max, the black market economy will not be too far behind. Then you should see some real free market action.

[Verrocchio]

Re: Biggest consumer borrowing decline in 65 years

I question the premise of the article. 'Cut back' implies an autonomous decision on the part of the consumer. I read a few weeks back a letter from the GM California Car Dealers Association (or something like that) addressed to GMAC demanding that the latter resume lending to its dealer network. I read somewhere else that 70% of all car purchases in the US are credit-based. Obviously this is one instance among many of curtailed credit. Thus consumer cut-back is probably in some measure 'consumer-led' i.e. due to belt-tightening and job apprehension. But it must also be influenced by lack of credit availability.

Maybe in the end the general economy doesn't care as the effect on economic activity is largely the same.

If they could, they would. No refinancing windfalls, no cashouts, no bonuses, laid off or a good chance of getting laid off, and no easy credit removes the means, not the desire.

[bart]

Re: Biggest consumer borrowing decline in 65 years





Another look at savings from a different data series:

[GRG55]

Re: Biggest consumer borrowing decline in 65 years

If this trend continues and proves even the least bit durable, there will be a Depression!

[FRED]

Re: Biggest consumer borrowing decline in 65 years

If this trend continues and proves even the least bit durable, there will be a Depression!

Keep in mind the way the government measures "saving" as disposable personal income minus personal outlays, that is, debt. The way the government looks at things, paying down debt = saving. Either or both trends may change and show up as a decline in the personal savings rate; either personal income falls due to rising unemployment, or debt is paid down relative to total debt as credit standards are tightened and creditworthiness declines, or both. This is usually but not always associated with recession.

In the current instance, clearly both factors -- falling incomes and net debt repayment -- are contributing to the rising savings rate due to rising unemployment and the credit crunch. The new consensus opinion of this rise in the savings rate is as this TIME Magazine article states.

The personal saving rate made a big rebound in the second quarter of this year, thanks to those government stimulus checks. It will probably drop back toward zero for a while, because it usually falls during recessions as people struggle to make ends meet. But after that I'd bet on a long rise. At least, I hope that's what happens. - TIME, Remember when they said not to worry about the low saving rate, Oct. 29, 2008

But that is not our forecast. Once again, the average economist fails to take into account the dynamics of a collapsing FIRE Economy. Here's what happened in Japan.

Household financial deficit, Japan, 1955 to 2003 (Source: The Disappearing Household
Financial Surplus—An Analysis of the Recent Plunge in Saving Rate,
Koichi Haji and Yasuhide Yajima,
Economic Research Group, NLI Research, 2004

During the period of FIRE Economic growth households develop the false belief that asset price inflation is wealth formation. As the prices of stocks and houses increases, households reduce saving -- increase outlays -- and increasingly allow stock portfolio and home price inflation to do the "saving" for them. If stock portfolios are appreciating at more than 50% per year as the Nikkei did between 1984 and 1990 while home prices doubled and tripled, the motive was strong to put less disposable income to debt repayment and into savings accounts but instead increase consumer spending using disposable income households might otherwise have saved. Many economists incorrectly apply the term "wealth effect" to this phenomena; the "wealth" was fake, not based on value creation but price inflation.

Later, after the financial bubble pops, the asset inflation reverses and stock-heavy portfolios and home prices collapse. The FIRE Economy collapse spills over into the real economy one to two years later producing the macro-economic effect of debt deflation and depression. Households stop spending the money they previously believed they didn’t need to save and briefly divert it to pay down debt. The operative word here is briefly.

After a brief increased in the household savings rate in Q4 2008, the savings rate falls to zero
and stays within that range for years.

This also occurred in the U.S. in the 1930s. Look for the U.S. personal and household savings rate to falls to zero later this year or next and stay there for years.

[LargoWinch]

Re: Biggest consumer borrowing decline in 65 years

Keep in mind the way the government measures "saving" as disposable personal income minus personal outlays, that is, debt. The way the government looks at things, paying down debt = saving.

Wha? :eek:

Those sneaky buggers!

Someone has any idea since when? I assume it is this fairly recent post-Clinton (like unemployment figures etc.)?

[bart]

Re: Biggest consumer borrowing decline in 65 years

Keep in mind the way the government measures "saving" as disposable personal income minus personal outlays, that is, debt. The way the government looks at things, paying down debt = saving.

That's only partially true, and even within the Personal Savings dataset actual and real savings is represented - and its been like that for decades.

That's also why I posted chart with one of the other datasets that measures savings in a different way. Even subtracting any desires on the part of the government to mask real data, the word savings itself is slippery - avoiding excess expenditures, preventing waste or loss and doing a set aside for future use apply for example among others.

[FRED]

Re: Biggest consumer borrowing decline in 65 years

That's only partially true, and even within the Personal Savings dataset actual and real savings is represented - and its been like that for decades.

That's also why I posted chart with one of the other datasets that measures savings in a different way. Even subtracting any desires on the part of the government to mask real data, the word savings itself is slippery - avoiding excess expenditures, preventing waste or loss and doing a set aside for future use apply for example among others.

There's nothing new under the sun here.

Funhouse Mirrors #1: Personal Savings Rate

[grapejelly]

Re: Biggest consumer borrowing decline in 65 years

This also occurred in the U.S. in the 1930s. Look for the U.S. personal and household savings rate to falls to zero later this year or next and stay there for years.

It is irrational to save when inflation is virulent. This is part of the corruption and destruction that inflation represents.

When people perceive the enormous inflation (coming soon to a theater near you) they will quit saving...

[LargoWinch]

Re: Biggest consumer borrowing decline in 65 years

It is irrational to save when inflation is virulent. This is part of the corruption and destruction that inflation represents.

When people perceive the enormous inflation (coming soon to a theater near you) they will quit saving...

GJ I agree...The question is; what will it take for people to not perceive "enormous inflation"? I am unsure that the recent - and very substantial - drop in RE and equities will do it.

Since 1995 they have seen stocks, real estate, tuition, gas, food, health care, drugs etc. skyrocketing. They have been conditioned over the last 14 years (Ed. will argue for more I guess) for prices going up. People think this is temporary.

Perhaps people are now wired to always spend all their available savings and credit (and then some)? Perhaps the article simply implies that people are maxed out?

All I am trying to say is this situation perhaps not of their choosing?

[Starving Steve]

Re: Biggest consumer borrowing decline in 65 years

It is irrational to save when inflation is virulent. This is part of the corruption and destruction that inflation represents.

When people perceive the enormous inflation (coming soon to a theater near you) they will quit saving...

But so far into 2009, prices in Canada seem to be FALLING at the grocery store. And fresh fruit and berries from Chile is now here, boxed and ready to go, in the middle of winter. Fresh lettuces of all different colours from the U.S. in the middle of winter, priced to sell, and ready to go. Salsa from Mexico and South Texas is now available, fresh, exotic, hot, and tasty...... Unheard of before in Canada! (This is a country where 10 years ago, a bottle of HP sauce or ketchup with vineger was considered plenty exotic.)

So if hyper-inflation is coming, and I suspect it is, where is it?

New car prices apparently falling. Starbuck's cutting prices on coffee. House prices dropping or drifting in Vancouver and Victoria..... Where is the hyper-inflation? :confused: