Click on image for larger graphic.
Karl Denninger provides us with the chart above. It does not include the past few months of consumer debt reduction, but otherwise it tells the story. It is especially telling in terms of debt versus income. Does this debt level look sustainable? Here is a link to the entire post, which is somewhat enlightening.
And so now we hear that consumer debt fell at a 10.4% annual rate in July. That folks is six straight months of decline and 11 straight months of credit card debt decline. Five times the debt reduction economists expected.
Whether this is good news or bad depends (a) on your perspective and (b) on the reason for the reduction. Let me start with (b). According to the following link to Bloomberg, while debt was reduced the past couple of months, incomes declined slightly and spending went up slightly.
Now I am no math major, but how can debt go down if incomes went down and spending went up? The only answer I can think of is the fact that debt can be reduced in two ways. Number one, it is being paid off. Given lower incomes and higher spending, paying down debt seems unlikely in general. Number two, debt can go away by being written off, as in credit card defaults, bankruptcy filings and the like. I have seen no official stats on what caused the reductions but I suspect some reduction through defaults is a big factor here. Oh, and there is a third way, government stimulus is used to pay down debt, which is not to be underestimated in the present environment. Government debt replacing individual debt is not, however, a debt reduction. It may move debt to a lower rate and put off to another day the payoff, but it is not reduction.
Now the prospect that some, perhaps a significant, part of this reduction is people defaulting on debt is not good news from any perspective. Yet some of it may be due to people actually paying off debts and whether this is good also depends on your perspective. Some of it is likely due to tightening credit standards, leading to less credit with which we can grown debt and which leads to a forced reduction in debt. Reading between the lines on the Bloomberg link, the mainstream press, and undoubtedly the Administration, view this reduction in consumer debt as a negative. Low spending and more savings does not spell recovery for the economy in the short term.
Yet there are those of us who view the short, even medium, term as pretty much a lost cause. We have way too much debt and the only cure (correction) to our situation is to gradually reduce it. It took us an entire generation to build the debt to record levels and it may take longer to bring it back down as it was built by baby boomers who increasingly cannot afford to pay it off. If you question me on our debt load, this link may wake you up a bit. The graphic at the beginning of this post comes from it.
Sorry friends but until the debt situation is under control we have no recovery. We may stabilize at a bottom but we will stagnate there. I prefer to take the pain for a few years and do what we can to reduce debt so less is pushed off on generations to come, but that does not seem to be the Administration game plan. They seem hell bent on getting people back to their spending ways and on supporting the financial companies that got us into this mess. I am done for now standing on my soap box, but I am starting to percolate with anger on what is happening, so watch for more. The market being up is fool's gold in my opinion. There is nothing other than government stimulus around the world keeping us there.
Disclosures: None.
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