Biggest consumer borrowing decline in 65 years

[jk]

Re: Biggest consumer borrowing decline in 65 years

Sorry if I was being overzealous. We've been working on an article about the savings rate that's an update to Funhouse Mirrors #1: Personal Savings Rate. Every mainstream economist on earth is now coming out with pronouncements that the savings rate is going up and how great that is for the future. As much as we'd like to see the savings rate rise and sustain at pre FIRE Economy levels -- around 8% -- and as a result for actual savings accumulate to fund future investment, it is unfortunately unlikely to happen. More likely, household cash flow will be siphoning off to pay down debt and little in the way of savings will accumulate.

please clarify why you want to disqualify paying down debt as a form of savings. if i get $1k and put it in a bank account versus using it to pay down my home equity line, i don't see a significant difference on my balance sheet.

[unlucky]

Re: Biggest consumer borrowing decline in 65 years

By consuming less than what you produce, and investing the savings in additional future production.

This is possible for everyone to do.

But if the money I save is lent to someone else to purchase production plant, then net saving across both of us is zero (he borrowed what I saved).

If US households are suddenly saving more (or, more likely, paying down debt) it is because they are spending less (they definitely aren't earning more). Bernanke et al would be right to view that as a poor outcome. In fact it's a bit of a train wreck, for both the US and the ROW.

It's not the fact that net savings are up that is bad news, it's the manner in which it has come about.

[ThePythonicCow]

Re: Biggest consumer borrowing decline in 65 years

As much as we'd like to see the savings rate rise

When a top fuel dragster blows its engine and grinds to a halt, short of the quarter mile, I don't figure the problem is too little fuel. I figure the problem is an inability to adequately control the energy generated by the fuel.

When you say you'd like to see more savings, I read that as if you were encouraging the crack addict to consume a healthy diet, rather than more crack. But if the crack head lacks sufficient sanity and competence to function, his life could still suck on a vegan diet.

We've been getting by on crack debt paper, rather than honest savings, as the source for the financial investments that fuel our productivity. The crack debt paper is having a bad hair day right now; but I suspect that finding an increased supply of healthy savings to fund our productivity investments won't get us much further than into the next chapter of the book on the "Trials and Tribulations of Human Civlization" which we are writing as we live.

Human civilization has discovered the means for enormous increases in productive capacity. Though our immediate problem seems to be a lack of quality savings with which to invest in this capacity, perhaps this is just the problem of the day. Perhaps our real problem is an inability to organize humanity's affairs at large, internationally and within large nations, in a balanced, fair and substainable manner. We're a bunch of 12 year olds, handed a fleet of top fuel dragsters. Looking back over what little I know of human history for the last few thousand years, and especially the last few hundred years, I see no examples of successful, substainable, long term stable arrangements of governance, economics, commerce and production on a large scale.

[stockman]

Re: Biggest consumer borrowing decline in 65 years

Sounds like you guys are speaking of the paradox of thrift (?)- net effect of a collective trend towards higher savings creates a lower collective level of savings? I would be in that camp I guess.

If the savings was being loaned and/or invested then you could argue that the higher savings could be constructive. But if the increased savings is a result of fear of loss, distrust in the finacial system and distrust of the political system (as appears to be the case) then it seems likely that the 'paradox of thrift' is here. In spite of what the household may feel/fear banks could lend the money if they were inclined, but they seem to be looking at declining collateral values, higher borrower credit risk and declining economic trends as an obstacle.

Self reinforcing trends tend to continue beyond what we expect, like markets. JMHO of course.

[ThePythonicCow]

Re: Biggest consumer borrowing decline in 65 years

Ah - but to rebut my last post, a steady flow of carefully invested savings improves the health of the economy, with more investments going toward whatever is more worthwhile. A torrent of crack debt almost assuredly leads to serious malinvestments.

Similarly most of us, if fed a steady diet of crack, become unproductive, if not disruptive. Many of us can live honorable and productive lives given a healthy diet.

In short, the quality of the sources of investment does matter, for it affects the choice of investments.

None of which is to claim that mankind has demonstrated that he knows how to properly manage the civilization he has built.

[rabot10]

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...

virulent - 7 dictionary results
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vir⋅u⋅lent

   /ˈvɪryələnt, ˈvɪrə-/ Show Spelled Pronunciation [vir-yuh-luhnt, vir-uh-] Show IPA Pronunciation
–adjective

1.	actively poisonous; intensely noxious: a virulent insect bite.

2.	Medicine/Medical. highly infective; malignant or deadly.

3.	Bacteriology. causing clinical symptoms.

4.	violently or spitefully hostile.

5.	intensely bitter, spiteful, or malicious: a virulent attack.

---

Origin:
1350–1400; ME verulent < L vīrulentus, equiv. to vīr(us) poison (see virus ) + -ulentus -ulent

Hey get a life

[Starving Steve]

Re: Biggest consumer borrowing decline in 65 years

I opine that banks won't lend worldwide because interest rates are too darn low. One bad loan at current low interest rates might take a century or two to recover from.

Similarly, current retirees might not be returning to stock markets of the world very fast either because the risks are not compensated by the rewards for being there. One more round of turmoil in world markets, and we might not be able to retire. We won't be back, at least not soon.

And as to this notion that it is impossible for the world to save as a whole, I say that is wrong. This idea, the so-called paradox of thrift (so rapidly accepted and unquestioned by economists) that worldwide saving is impossible, is more evidence that the Keynsians run the universities..... But back to the debate: The world could produce more than it consumes, and this would provide for a better standard of living for our children. With proper utilization of savings into types of infrastructure, the world might end-up with a cleaner environment or a lower cost of living, or both--- probably both.

[unlucky]

Re: Biggest consumer borrowing decline in 65 years

And as to this notion that it is impossible for the world to save as a whole, I say that is wrong. This idea, so rapidly accepted and unquestioned that worldwide saving is impossible is more evidence that the Keynsians run the universities..... But back to the debate: The world could produce more than it consumes, and this would provide for a better standard of living for our children. With proper utilization of savings into types of infrastructure, the world might end-up with a cleaner environment or a lower cost of living, or both.

Maybe it's just a question of what we include in "the world". If all households save, and this money is lent to businesses who spend the money on plant, then in my accounting the net saving is zero (the households lent, the businesses borrowed). But perhaps in your accounting this would count as productive net saving? If so, fair enough.

It would be great if US household income increased and households were prudent enough to save the extra income. But in fact I think what we are seeing is a decline in US household spending, with some of the extra being "saved". This decline will be matched by a decline in production elsewhere, leading to a decline in saving elsewhere that closes the circle with a decline in lending to US households. Overall a bad outcome for everyone.

You are right that the economy should have re-oriented towards production with increased net savings based on increased incomes long ago, when there was still time.

[LargoWinch]

Re: Biggest consumer borrowing decline in 65 years

Rick my friend, have you been drinking again?

[LargoWinch]

Re: Biggest consumer borrowing decline in 65 years

I opine that banks won't lend worldwide because interest rates are too darn low.

SS, I do not want to pick on you, but I have to disagree. Banks can charge whatever interest rates they wish regardless of the overnight rate as set by CBs.

With proper utilization of savings into types of infrastructure, the world might end-up with a cleaner environment or a lower cost of living, or both--- probably both.

The key word here is "might" as building bridges to nowhere is not gonna help...

[tsetsefly]

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 the FIRE economy depends on it...

WHen tough times are seen ahead its natural for banks to stop lending as much to safeguard for the future and for consumers to not want to borrow to trade in their 2006 F-150, when they know they might lose their job...

Its quite rational for this to be happening, yet our economy is so dependent on consumer spending that, government, economist etc. want to continue the trend at all cost...

[Starving Steve]

Re: Biggest consumer borrowing decline in 65 years

Yes, banks could go ahead and charge 30 or 40% or 50% interest on loans, but they don't and for a number of reasons: a.) competition, b.) usery laws, c.) goodwill, and d.) some risk is not worth lending on at any price.

[Starving Steve]

Re: Biggest consumer borrowing decline in 65 years

Please see to-day's remarks here at itulip by the economist, Shiller predicting that this recession could go on for a decade and that unemployment might gradually increase ( this could just be the beginning ).

When I think of this sad situation, I get quite angry at Keynsian economists who led the world into stagflation in the decade of the 1970s. Apparently not learning from the stagflation episode, the Keynsians were back in the '90s with a dot.com boom and bust. Then came their housing bubble and bust. And now we have the worldwide recession which apparently, according to Shiller, could last for a decade and with horrendous unemployment ahead.

Heads have to roll at the universities because this kind of economic thinking-- Keynsian economics and supply-side economics--- has now led to global economic decline and chaos in world markets.

[Starving Steve]

Re: Biggest consumer borrowing decline in 65 years

The Fed was unwilling to manage the economy in the 1920s, so the U.S. ended-up in depression in the 1930s. And the Fed was unwilling to manage the economy in the 1970s, so the U.S. ended-up in stagflation and a near-depression in the 1980s. And the Fed was unwilling to manage the economy in the 1990s, so the U.S. led the world into a stock and housing market bubble. This led to a bust of horrendous proportions, and one economist ( Shiller ) says to-day that this bust could last for a decade and with horrendous unemployment ahead.

I see a pattern here. :rolleyes:

[Rajiv]

Re: Biggest consumer borrowing decline in 65 years

Also useful to help grasp the concept is Louis Even's parable that you had at one point posted

The Money Myth Exploded

1. Shipwreck survivors

An explosion had blown their ship apart. Each one grasped the first bit of wreckage that came to hand. And when it was over, there were five left, five huddled on a raft which the waves carried along at their will. As for the other victims of the disaster, there was no sign of them.

Hour after long hour their eyes searched the horizon. Would some passing ship sight them? Would their make-shift raft finds its way to some friendly shore?

Suddenly a cry rang out: “Land! Look! Over there, in the direction the waves are carrying us!”

And as the vague silhouette proved itself to be, in fact, the outline of a shore, the figures on the raft danced with joy.

They were five. There was Frank, the carpenter, big and energetic. It was he who had first cried, “Land!”.

Then Paul, a farmer. You can see him, front and left in the picture, on his knees, one hand against the floor, the other gripping the mast of the raft.

Next is Jim, an animal breeder; he's the one in the striped pants, kneeling and gazing in the direction of land.

Then there is Harry, an agriculturist, a little on the stout side, seated on a trunk salvaged from the wreck.

And finally Tom, a prospector and a mineralogist; he is the merry fellow standing in the rear of the picture with his hand on the carpenter's shoulder.
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