Thursday, December 6, 2012

Households Continue to Shed Debt ... Long Term That's Essential ... Short Term It's a Drag on Economy

We have too much debt as individuals, as a nation and even worldwide. No news there.

And since the U.S. economy is roughly 70% dependent on consumer spending, when consumers are adding debt, as we did for several decades, that results in increased economic activity. No news there either.

But when consumers begin in earnest to shed debt, that has a slowing effect on the economy as consumers substitute more of MOM for debt service instead of making consumer purchases.

While this substitution effect is a negative while it's occurring, the necessary "deleveraging" of the consumer sets the stage for a more stable and long lasting economic expansion later.

Of course, how much later is the $64 question, and the answer is simple. The bigger the debt load that needs servicing, and the slower the economy grows in the future, the longer it takes to rebalance.

But to repeat, deleveraging is a vital step on the road to fiscal sanity, which in turn will lead us to lasting economic growth and job creation.

Households back to slashing debt, Fed says has today's good news concerning the ongoing consumer deleveraging process underway:

"Households went back to shedding debt in the third quarter, with Americans repaying mortgages even as student and car loans piled up, the Federal Reserve said Thursday.

The Federal Reserve . . . reported household debt fell an annualized 2% in the third quarter to $12.87 trillion, marking the 16th period out of 18 that has seen a decline. The 2% drop was the largest since the second quarter of 2011.

When factoring in inflation, American households have deleveraged by about 13% since the onset of the Great Recession.

In the third quarter, a 3% drop in mortgages more than offset the 4.3% increase in consumer credit, namely student and car loans.

While home prices have improved of late, they are still more than 25% below their peak levels, CoreLogic said last week. Read more on U.S. home prices.

The Fed reports household real-estate assets of $17.2 trillion, down 17% from 2007 levels. Helped by a recovery in the stock market, overall household assets were up 2% in the third quarter."

Summing Up

The student loan situation is a developing debacle in need of a solution. Alas, none is even being discussed. But let's set aside the issues with student loans for now and focus our attention on home related and credit card debt.

In that regard, it took a very long time to get into the very deep financial hole we've dug for ourselves with home mortgages, home equity loans and credit card debt.

Accordingly, getting out of that hole will take us a very long time as well.

That said, we can't hope to ever get out if we don't stop digging.

And we've pretty much stopped the digging, student loans excluded.

My bet is that now we'll keep on keeping on doing the right thing despite kicking and screaming every step of the way.

Debt denial is over. Debt deleveraging has begun. That's a good thing.

Thanks. Bob.

1 comment:

  1. This is really an interesting and moreover a significant news not only for the entire American households, but also for the national economy. If common households are shedding off debts, it is certainly going to give some relief (if not whole, to some extent) to the national economy since more consumer debt means more bankruptcy filings, more foreclosures - more deficit and for which, the federal government needs to inject more liquid money into the economy. Apart from this, it is also amazing to know that now the common mass are also trying to take some of the burden of national debt by donating to the federal government!