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Daniel Alpert: Consumer Credit Growing at Highest Rate in Past Decade – Unhealthy and Unsustainable?

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By Daniel Alpert, the founding Managing Partner of Westwood Capital. Cross posted from EconoMonitor

Alright, got your attention. But the headline above is not offered merely by way of titillation, as a former partner of mine would say—it has the added advantage of being true.

As many of you who frequent this space already know, I have been tracking the rates of change in the 3 month moving averages of U.S. consumer credit outstanding and retail sales since a piece we did on the subject in November of 2010. We look at aggregate consumer credit (and not merely the revolving portion more commonly associated with retail activity) because we believe that term loan borrowing—where available (chiefly student loans and autos)—frees up cash for consumption. Another way of viewing this is that transportation and education are not truly elective purchases and not leveraging those purchases would otherwise reduce overall consumption.

What the numbers tell us today (as illustrated in the below graph) is that, as of January 2012, the growth rate in all forms of consumer credit on a 3 month average basis grew at a rate greater than at any time during the credit bubble. Moreover, at $2.495 trillion, outstanding consumer credit stands a 97% of its peak of $2.576 trillion in August of 2008. Deleveraging, my friends, this is not.

Yesterday the Consumer Financial Protection Board reported that student loans alone likely moved past the $1 trillion milepost at year end. This not only acts as a present danger, but will reduce consumption years into the future as the present cohort of students enter their prime consuming years “pre-burdened” by indebtedness. Normally, we would rely on post-recession rapid growth to reverse the situation, but in an oversupplied, demand-impaired global economy GDP growth proves elusive.

While aggregate payrolls are up 4.6% YoY since February 2011, as 2 million net jobs were created over the past year, this has come at the expense of declining real wages and pretty flat (up 1.8% YoY) nominal wages. So the income/expense hole for many workers has become wider, and even the newly employed and re-employed are coming on in such low wage categories that when you subtract foregone transfer payments (unemployment and other benefits) their net additional income (and the contribution thereof to consumption/GDP) hasn’t risen all that much.

As we all sit here in our liquidity-bloated, but still over-leveraged, developed world economies, wondering if this year’s rendezvous with recovery will be the real thing – I offer the follow three thoughts with regard to the below graphic (click to enlarge):

  • Are we once again entering a zone similar to the period immediately prior to the Great Recession in which consumer borrowing also grew rapidly more and more of the new borrowing was applied to debt service instead of new consumption? Watching retail sales trends over coming months should be instructive in this regard.
  • The crash in the housing market has left us with $873 billion in Home Equity Line of Credit balances (at Q4 2011) owed by consumers, most of which is no longer collateralized by home value. While borrowers may be making payments (many at vastly reduced rates of interest giver the floating rate nature of those loans), I would put forward the argument that as a practical matter unsecured consumer debt in the U.S. is actually well over $3 trillion.
  • We are programmed by past cyclical phenomena to look at consumer credit expansion after a recession as being a positive – heralding the arrival of the “confidence fairy” who the more supply-focused in the macroeconomic establishment view as the critical element to a recovery. There is no doubt that there is an element of this in the expansion illustrated below but, like so many things about the present secular crisis, that is surely not the driving force when a substantial portion of the increased indebtedness is applied to making ends meet, rather than triggered by optimism about the future.

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47 comments

  1. Mansoor H. Khan

    Daniel Alpert said:

    “This not only acts as a present danger, but will reduce consumption years into the future”

    Ok. If we need people to consume (spend) more all we need to do is to print money via the FED and simply hand it out electronically by crediting consumer’s bank accounts. Ever heard of Social Credit?

    All this currency issuance via making loans is a huge fraud which needs to come to an end. The entire debt based financial system is a lie.

    More at:

    Here is how the banker’s game works:

    http://aquinums-razor.blogspot.com/2011/11/here-is-how-bankers-game-works.html

    Mansoor H. Khan

    1. Jim

      The Fed can’t redistribute cash to the consumer.

      But Congress, via fiscal policy, can. Yet, I can’t recall any Dem representative who has embraced such an ambitious fiscal program.

      Also, I’d like to quote Roosevelt’s first Fed chief, Marriner S. Eccles.

      ——–

      http://www.mtnmath.com/banana/greatDepr.html

      As mass production has to be accompanied by mass consumption, mass consumption, in turn, implies a distribution of wealth — not of existing wealth, but of wealth as it is currently produced — to provide men with buying power equal to the amount of goods and services offered by the nation’s economic machinery. [Emphasis in original.]

      Instead of achieving that kind of distribution, a giant suction pump had by 1929-30 drawn into a few hands an increasing portion of currently produced wealth. This served them as capital accumulations. But by taking purchasing power out of the hands of mass consumers, the savers denied to themselves the kind of effective demand for their products that would justify a reinvestment of their capital accumulations in new plants. In consequence, as in a poker game where the chips were concentrated in fewer and fewer hands, the other fellows could stay in the game only by borrowing. When their credit ran out, the game stopped.

      That is what happened to us in the twenties. We sustained high levels of employment in that period with the aid of an exceptional expansion of debt outside of the banking system.

      ——–

      1. F. Beard

        Money should be spent, not lent into existence. That would bypass the necessity of repayment and of interest. The money supply would thus steadily grow, debt-free, just like the economy should.

          1. F. Beard

            Do you think that because credit must be repaid that it is not equivalent to counterfeiting?

          2. votersway

            In the case of borrowing, it depends – abuse is possible. That’s what Glass-Steagall and the New Deal were for – to prevent abuses.

            In your case of “simply spending” it’s always counterfeit, it’s always abuse.

          3. F. Beard

            In your case of “simply spending” it’s always counterfeit, it’s always abuse. votersway

            Wrong. Suppose Lowes used its own movie tickets as money and redeemed them for performances? Where is the counterfeiting?

            OTOH, credit creation in a government enforced monopoly money supply for private debts is ALWAYS equivalent to counterfeiting since some – the so-called credit-worthy – are allowed to steal purchasing power from everyone else.

          4. votersway

            You are mixing things up. You described a debt instrument (tickets) and your “redeeming” is simply repayment of debt.
            That’s not the MMT you advocate, MMT extracts both during “spending” and during “returning” as tax. A counterfeiter extracts only when spending but there is no returning. MMT extracts both ways, it’s doubly corrupt.

            There is no need to double corruption, simply deal with the abuses as the New Deal did.

          5. F. Beard

            That’s not the MMT you advocate, votersway

            MMT is part of the solution but government money should ONLY be legal tender for government debts, not private ones.

            MMT extracts both during “spending” votersway

            Not illegitimately if genuine private currency alternatives were available. In that case, there would be no stealth inflation tax that the population could not escape.

            and during “returning” as tax. votersway

            Taxation is a given. What is not a given is the stealth inflation tax which should be abolished.

          6. F. Beard

            simply deal with the abuses as the New Deal did. votersway

            Credit creation in a government enforced monopoly money supply for private debts is inherently corrupt since there is no escaping the “stealth inflation tax” (in this case a private tax) of the banks and the so-called “credit worthy” on the rest of the population.

          7. votersway

            I know about the abuses, and I’m proposing a workable, tried and true way out. Balanced trade, Glass-Steagall, fully transparent Fed, limits on banks size – this is the bare minimum, which is also realistic. We had all of it before and it worked well.

            Revolutionary changes to the financial system would ruin the country even they were sound. Maybe it’s a good thing that there are no radical proposals that are actually sound – it makes it easier to focus on the evolutionary steps which are the only safe way to improvement.

            Childish “theories” like MMT are a double problem for two reasons. First, they are more corrupt than the current system. And second, even if they don’t come to pass, they create confusion and prevent the real alternative from gaining support.

          8. F. Beard

            To summarize, both the Federal Government AND the banks and the “credit-worthy” are allowed to steal purchasing power from the general population because of the government enforced monopoly money supply for private debts.

          9. F. Beard

            Maybe it’s a good thing that there are no radical proposals that are actually sound – votersway

            That’s a lie. The concept of coexisting government and private money supplies goes back at as far as Tally Sticks which were successfully used for over 800 years and beyond to Matthew 22:16-22 where they are implied.

          10. F. Beard

            We had all of it before and it worked well. votersway

            Especially if one was white and “credit-worthy” or a banker.

            The old way was corrupt and so are you if you think there is no non-corrupt alternative.

          11. votersway

            You are pointing out to dead societies to make what point exactly? To make us follow them there?

            You appear to dislike the time during the New Deal… only the crooks disliked it.

            You propose MMT… which is banana republic finance, used by dictators. I gather, you prefer third world poverty and enslavement.

            Hmm, as G Bush said, “there is nothing wrong with dictatorship a long as I’m the dictator”

            So I guess MMT has supporters in certain circles…

          12. F. Beard

            You propose MMT… which is banana republic finance, used by dictators. votersway

            I said that MMT was part of the solution. The other parts are a bailout of the entire population, including non-debtors, and genuine private money alternatives for private debts.

  2. psychohistorian

    It could be a Roaring 20′s sort of attitude among many that they should keep partying until the music stops.

    As one of those silly sorts with no debt but who also has some resonance with the idea of a debt jubilee as part of the coming correction, I hope wise minds craft a purposeful course toward fiscal responsibility as part of the………………………….Nationalization of the Fed!!!!!

    1. different clue

      I am another one of those silly sorts who has no debt. Do mirrors crack with laughter when we walk by?

  3. greg

    Debt has to expand in order for the economy to keep growing. The debt burden is now so great that the economy cannot expand merely with expanding incomes, because money is, (except for the expanding debt,) continually being siphoned out of the real economy to pay the charges on the debt already out there. Peoples’ expanding incomes, therefore, are limited to the difference. See:http://www.youtube.com/watch?v=rCu3fpg83TY

    See Also:http://anamecon.blogspot.com/2010/11/banks-are-forcing-debt-on-rest-of-us.html

    Or the government could borrow, and it does, which just saves the rest of us from borrowing, but runs up our collective indebtedness, anyway. Or it could print money, and give it to the average Joe, which it should, but won’t.

    But then, it should also prosecute fraud, but doesn’t.

    As long as the government continues to borrow, the music will continue to play.

    JBTW, everybody seems to forget that debt is money owed to someone. It is these people, and their creatures in government, who are pulling the strings, screwing everybody else and the real economy.

    In order to hold onto their nominal gains, they are destroying the real economy all our lives depend on.

    If I were a historian, I would consider it an interesting case of the self-destruction of a society whose institutions seem (so far) incapable of preventing it.

    1. different clue

      How can an economy grow if it runs out of bio-physical substrate to feed on or grow into? The answer of course is that it cannot. It (or rather the people who make it up) will keep turning energy into waste heat in order to turn matter into waste crap until there is insufficient matter and energy left to feed the bonfires of growth. The economy ( any economy) will then shrink to fit the shrunken substrate . . . or if its participants kill the substrate thoroughly enough, the participants and their economy will die off altogether.

      Our choice is now between full-metal dieoff or kinder-and-gentler dieback. Actually, that choice belongs to the Klepton Lords who own our government and flagship economic and bussiness institutions. The only narrow zone of choice we have is whether to do what little we collectively can to undermine and tear down and destroy the Kleptons and their Kleptonomy before they kill us all.

      1. different clue

        Correction. . . I should have said ” any GROWTHIST economy” will end up just like many smart people have said.
        A steady-state economy or a DEgrowthist economy might permit the survival of its participants and their supporting matrix and substrate.

        Let us hope that the Growthist Economy kills itself and its knowing supporters so fast that they don’t have time to utterly kill and sterilize the biophysical substrate they feed on as their last act of spiteful vengeance.

        1. greg

          I could have put it the other way: The economy has to keep growing because debt, as per the powers that be, has to keep expanding. But reality imposes, and the S shaped logistic curve takes over from the exponential: Growth ceases when the environment is fully exploited. And the growth of debt can no longer be sustained. Watch the video.

          “Growthist Economy” is necessary as long as you have a “Growthist Population.” But you’re right. The only real question is the form of Malthus’s revenge.

          Our dysfunctional financial system is no help. Watch the movie. It’s fun, instructive, and will help you with your arguments.

    2. votersway

      “an interesting case of the self-destruction of a society whose institutions seem (so far) incapable of preventing it”

      Why do you assume that “they” are trying to prevent it? There is no evidence to support such an assumption. Fixing things is VERY EASY but… reading bills like NDAA 2012 and executive order March 16, 2012 will convince you that “preventing” is not the goal here.

  4. ArkansasAngie

    I don’t believe that bond vigilantes exist anymore. The government owns the debt now.

    They are printing money to pay themselves. And they get a cut in the form of high salaries and wonderful bonuses and … AND … get out of jail free cards.

    1. votersway

      That’s true. The government debt has become an extraction tool in the hands of the privileged. That’s the reason for the mad debt issuance in recent years – it has nothing to do with fixing the economy.

      1. F. Beard

        The debt of a monetarily sovereign nation is ITSELF a form of money and is more inflationary than pure money printing would be since interest must be paid on it. There is no legitimate excuse for issuing it in lieu of money printing.

  5. Student

    Daniel:

    I have just Discover (DFS) latest earnings presentation. DFS is into credit cards, consumer loans and student loans. It appears that the nice folks at DFS believe credit losses have almost disappeared and thus are releasing huge amounts from their reserves.

    Such behaviour could make consumer loans appear larger than they are because nothing is written off any more. If the reserves are released at once everywhere (as very much look like they are) that could appear as growth in consumer lending???

  6. Moneta

    “This not only acts as a present danger, but will reduce consumption years into the future”

    Unless we get huge inflation somewhere down the road which make current debt loads look puny. For some reason, the markets seem to think deflation will stay forever.

    1. Jim A

      Or those debts disappear through foreclosure, short sales, or bankruptcy. “More credit,” is the cargo cult thinking of the powers that be and I see NO sign that they are thinking beyond it.

      1. John L

        Except, in the case of student loan debt, declaring bankruptcy does not erase it. That debt (which is probably the largest non-consumer debt group) will remain a drag on the economy for those beginning their careers. For example, I know of several coworkers with student loan debt over $20k, and those were engineering graduates (with near-guaranteed careers). At least they have jobs; law, business and liberal art graduates are finding there just aren’t jobs out there for them, and their student loan debt is much, much higher in many of their cases.

        1. Moneta

          With yields so low, long term investments are not being made. This will drive up the price of everything as the population still keeps on growing and supply/capacity stays flat or dwindles.

          In the next downturn, rates will not get cut. Refis will not occur. This will lead to bankruptices as well as M&A activity like we have not seen in decades. Further capacity will disappear.

          Furthermore, in the next few years, households will start buying houses again and leverage will start to creep up.

          And GDP will shoot up not because of growth but because of inflation.

  7. Ep3

    What is meant by “liquidity bloated”?
    Does that mean the ability of assets to become liquid is too easy, ie beyond a standard market metric?

    1. diptherio

      I was also curious about this phrase. I heard recently that the Fed is reporting that M2 is actually shrinking…despite the massive injections by the Fed during the GFC (and continuing).

  8. spooz

    And now we have Barney Frank pressuring FHA’s DeMarco to write down principle balances on Fannie/Freddy first mortgages, leaving the HELOC lenders intact. Which, as Gretchen Morgenson points out in your NYT link above, amounts to another backdoor bailout for the banks.

    “The crash in the housing market has left us with $873 billion in Home Equity Line of Credit balances (at Q4 2011) owed by consumers, most of which is no longer collateralized by home value.”

  9. Blurtman

    Yes, the debt, blah, blah, blah,…. But look at GDP, eh? No one goes back and subtracts bogus consumption, e.g. RE, from past GDP numbers, do they? And if you are in the club, the Fed will take this toxic debt off your hands. What’s the problem?

  10. Jim

    Awesome job, Yves.

    I imagine that the chart will give Bernanke pause as he considers when to increase the fed funds rate from the current 0.125%.

    But by prolonging ZIRP, he continues to s**** savers and senior citizens. And also public pension funds which find it more difficult to meet the 8.5% annual investment target.

    1. different clue

      Isn’t that exactly why Bernanke is applying near zero interest rates? To try torturing savers and pension funds into moving the money they handle into the Wall Street lamprey tanks? To bubble-swell the stock indexes?

      The savers’s only defense is to eat the pain and the loss in order to avoid the greater loss at the bottom of the stock-markets buffalo jump that Bernanke is trying to drive them over. The Pension Funds’s only defense would be to officially re-write ( or get re-written for them) whatever rules that demand they make 8.5% growth targets. Those rules become in this context merely a line of applied fires and beaters designed to drive the Pension Funds over the same buffalo jump. What if Pension Fund advocates and lobbyists were to formally apply for relief from the 8.5% goals for the duration of the Bernspan Fed’s suppression of interest rates? To whom would they apply for such relief?

      1. Fiver

        The notion that pension funds could or should feed off bogus financial flows created for and by financial predators leeching the producing economy was madness from the get-go.

        If pensions are a public good – and I believe they are – then they should not be subject to systematic pillage. Plan members need to pay more; employers need to pay more AND stay current on funding; and governments need to ensure that funds/plans meet acceptable minimum coverage, else top that coverage up. And all of it by law fenced-off from Wall Street’s grimy paws.

  11. bmeisen

    Term loan borrowing ” … frees up cash for consumption. Another way of viewing this is that transportation and education are not truly elective purchases and not leveraging those purchases would otherwise reduce overall consumption.”

    Entertaining formulation here.

    What? You mean THE icon of American freedom – the car – is not a “truly elective purchase”? You mean Americans are forced to buy cars?

    (Answer: damned right! Ain’t no bus or tram or subway running in my town!)

    And you mean the most fateful decision that an American can make – where to go to college – is in fact not a personal choice but some sort of unavoidable necessary forced act, like … like … like a duty to contribute to the greater good of society?

    If so then why the hell do I have to borrow 50k to fulfill my duty? If education is a public good then shouldn’t it be free to all those who qualify?

    Also noteworthy is the expression “the present secular crisis”. Has this guy read Bella? Would a governmental crisis be a sacred crisis? If so I note that the US gov’t i.e. the American taxpayer is the duct tape holding the financial mess together and so it’s all a “sacred” crisis.

    1. Darren Kenworthy

      “Secular” in this case means “long term”, or a trend in evidence throughout an extended period.

    1. Blurtman

      You had access to some really good heroin for several years, and now you are complaining because you don’t.

  12. Fiver

    Virtually assured that a significant portion of the education loans are never fully paid back, with neither students, nor society having been served well by yet another hugely expensive, money-induced mutation in the basic code of public/private “business” conduct.

    The car loan thing is just plain depressing:

    The real situation is an almost comic over-supply, over-ownership of cars, yet when the opportunity presents itself to make a big commitment to a different, better urban transportation future, the best we come up with is to re-start the subsidization via BS fantasy financing of the worst sort of resource misinvestment – an enormously expensive process whereby billions of tons of materials are converted into toxic, energy-draining cubes, often linked in chains running for miles, 1 for most people now alive in the US.

    The new “normal” in terms of Beltway thinking is that so long as Governments hold Certain Death at bay, the public will accept pretty much anything else, so it’s basically back to deeply conflicted business as usual.

    And a quick couple of frothish years later – pop goes the weasel, and the burst of a materially smaller bubble than ’08 could readily, by virtue of context, be more than enough to knock the entire set of wobbling plates to the ground. As in broken.

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