Unconventional Wisdom: Consumers Are Reducing Debt in Recession

The conventional wisdom has been that as the recession deepens and more people lose their jobs, they will rely more heavily on credit cards, etc to fund their expenses, consumer debt will rise, and banks will struggle with more and more debt that is less likely to be repaid.

Well, based on the graph below from the April 13th issue of Business Week, the consumer is de-leveraging, not borrowing more. This trend is also seen in the savings rate, which has spiked in recent months. As a result, consumers might be in better financial condition after the recession than before, ironically enough.

Comments

[cabaretewil...:]

The above comment - spend more- leads right back inbot the mess. Save and spend what you have saved!

Apr 08 09:06 AM

[TeresaE:]

OF COURSE THEY ARE PAYING OFF THEIR CARDS!!!!!

The banks are taking away credit, pushing interest towards 30% and more and adding fees and traps on most everyone.

How much of our economy is doing nothing but feeding the banks? Between interest rates being out of control, yanking paying notes based on nothing more than industry and balance sheets, and all the fiat money printed by the Fed and spent by Congress, I would guess over 25% if not higher.

Cetin fark your spending more and saving less. We, the American consumer were duped.

They offshored or imported our jobs and shrunk our pay, upped our expenses and generally spit on us.
Then we were gifted free credit to hide the destruction
Then the banks got Congress to take that away from us.
Now they are stealing any chance our children have of pursuing the American dream--unless they go into politics.

Great plan.

Apr 08 09:08 AM

[Jonathan Ch...:]

Unlike Cetin, who-according to his blog, is always right, I often make mistakes, but do have opinions - such as:
Cetin is right that you should spend as much as you can and get as much (fixed rate) debt as you can afford. (The term "as you can afford" is VERY important).
Doubling the National Debt will essentially halve the value of the dollar (it's called inflation) so you will be paying back that debt in devalued dollars (good fro you, bad for lenders).
So if you borrow now you will be paying back less in the future and keeping you and your neighbor employed at the same time.

Go for it!!

Apr 08 09:22 AM

[rm:]

[The conventional wisdom has been that as the recession deepens and more people lose their jobs, they will rely more heavily on credit cards]

You can't rely more heavily on your credit card when your line has been cut in half or suspended.

I've also noticed that there has been a dramatic reduction in the appetite for spending and consumption.

People are slowly waking up to the fact that all the mindless consumption adds little to no value.

They are also finally realizing that all the dancing around they were doing to satisfy Fair, Isaac still didn't protect them from a system that's designed to extract the maximum amount of dollars from their pockets.

What took them so long?

Economic assault, whether real or imagined, leads to introspection.

If only our leaders could have kept the consumers from thinking for themselves!

Apr 08 09:40 AM

[Larrysyr:]

If people find value in spending, fine. But how did over-spending, over-leveraging, and buying crap just for the sake of of buying, ever become synonymous with patriotism? That has to be the most idiotic idea ever perpetrated.

There is always some disconnect between what individuals perceive as good for their own situations and what macroeconomists perceive as good for the overall economy. Let's recognize that and get on with our lives. I'm going to live within my means, save, and invest toward the goal of a more secure life.

Apr 08 09:45 AM

[richard_nog...:]

People are finally becoming more savvy with their personal finances. If they save for it, then buy it the amount of spending can approach levels previously associated with debt. For instance, Person A pays off his car and keeps making car payments to his/her savings account, during their ownership of the car. When the car quits, person A has enough saved to buy another car or at least make a significant down payment. Did spending change in this model? No. What changed is the timing of when money is spent. The debt model was set up to keep consumers paying rates that they cannot control. Savings models return that control to the consumer.

To me, indebtedness is a form of slavery and we have become a nation of slaves. It is up to us to decide if we want ourselves and our children to continue to be slaves--or choose freedom.


On Apr 08 09:06 AM cabaretewilliam wrote:

> The above comment - spend more- leads right back inbot the mess.
> Save and spend what you have saved!

Apr 08 10:38 AM

[Pstoneki:]

I personally couldn't imagine spending/wasting money (or more appropriately, the time it took to earn that money) just to keep the economy going. I save and pay cash for my cars, vacations, and everything else I buy. And I don't buy crap that I don't need. Neither do my wife or kids, since, on their own, they've come to realize that all that junk does nothing but weigh you down and make you unhappy.

Maybe if our economy was built on true fundamentals, that companies made things that people needed rather than the endless cycle of making trinkets to sell to people who don't really want them (but can be convinced otherwise) only to have those people throw the trinket away and then buy more, maybe then we will get back to a sustainable economy. I'm not here to define what a 'need' is, nor a 'want'. However, I can tell the difference when I see it and I think most other people can too.

Apr 08 11:45 AM

[Allan Frain:]

Agreed.

The absurd notion that spending for its own sake is somehow what we ought to do for the sake of the economy at large simply leads to more misallocation of resources. Fortunately, I think this notion is correctly being abandoned.


On Apr 08 11:45 AM Pstoneki wrote:

> I personally couldn't imagine spending/wasting money (or more appropriately,
> the time it took to earn that money) just to keep the economy going.
> I save and pay cash for my cars, vacations, and everything else I
> buy. And I don't buy crap that I don't need. Neither do my wife or
> kids, since, on their own, they've come to realize that all that
> junk does nothing but weigh you down and make you unhappy.
>
> Maybe if our economy was built on true fundamentals, that companies
> made things that people needed rather than the endless cycle of making
> trinkets to sell to people who don't really want them (but can be
> convinced otherwise) only to have those people throw the trinket
> away and then buy more, maybe then we will get back to a sustainable
> economy. I'm not here to define what a 'need' is, nor a 'want'. However,
> I can tell the difference when I see it and I think most other people
> can too.

Apr 08 01:38 PM

[Responsibility:]

Glad to read about comments by many on responsible spending vs over-spending; the former is good while the latter is harmful to individual as well as to society.

When one over-spends and has no ability to pay back on loans, one is in fact stealing from others. When the system fails to discourage/restrict over-spending, everyone will get into the act for a fair share, resulting in massive default on loans and the financial crisis we are facing.

Besides over-spending, there is problem with wasteful spending too.

When one can afford to spend, one should still avoid wasteful spending because that will drive up costs for everybody. Costs will snowball into un-restrained inflation and a financial bubble waiting to burst. Wasteful spending has other very harmful side effects as well. Say one can afford to over-cool or to over-heat one's home, encouraging industry to invest resources for more energy to support wasteful behaviours instead of for new technologies that matter in the long run.

A simple test for wasteful spending is to ask if there are many people who would want to exchange payments with you on similar spending items. Would your neighbour want to pay your utility bills while you pay their's?

Apr 08 01:52 PM

[Dave Wrixon:]

You need to get Cause and Effect sorted out. There are many separate drivers at work.

Firstly, some banks would like to lend but cannot because they are effectively insolvent.

Secondly, the banks won't lend to many people because they are considered not sufficiently credit worthy.

Thirdly, many people who have a good relationship with a solvent bank will not extend their credit because they fear they are going to lose their jobs.

Fourthly, those that don't have the above fears are worried about the future cost of variable rate credit.

Fifthly, many of those that would borrow to invest in projects can no longer see a return on that investment, so they have deferred.

I am sure you can think of more. But in general the primary cause is a credit crunch, which is causing the recession, rather than the other way around, although there are as you can see above secondary effects fueling a negative feedback loop.

Bernanke and Geitner are working hard to make money available to lend, in the hope that this will get banks to lend again. It should help over come the bank solvency issue to a greater or lesser degree, but it won't resolve the issue of most borrowers being a bad risk. A general increase in confidence may help to mitigate the secondary negative feedback effects, but ultimately the economy needs to deleverage in order for general creditworthiness to return.

Due to the degree of the excess that occurred during the Bush era, it will take a massive contraction for this to work through the system, and much of the healing process is so chicken and egg many are going to find themselves with an impracticable problem for years.

The other problem is that the Fed and Treasury intervention will have side effects, some very predictable indeed. These side effects may actually end up out weighing the benefit. Looming largest amongst these is an International collapse of confidence in the US Government's ability and willingness to repay or the money they are borrowing. Sure the Fed can plug the gap with expansion of the balance sheet, also known as Quantitative Easing or simply Printing Money. However, if that is the only way of financing the Governments need for cash then the whole thing really does start to look like a Ponzi Scheme. This will mean that there will be a flight from dollars into anything that is unrelated to US Economic System. The dollar will collapse. The worrying thing is that the higher to dollar soars the higher the risk that there will be catastrophic collapse.

The logical thing to do would be to manage the value of the dollar as low as possible. The only problem is that Obama's wasteful stimulus means they need as much money as they can get for as cheap as they can get it for as long as they can get it. That makes the whole thing very unstable. The worse thing is that if Obama had done what he promised during the election, the benefit of much of the stimulus would have been perhaps justifiable. Whatever, happened to the largest investment in Highways to since the 1950's? What happened to all the real infrastructure investment? Well basically Washington has taken the nation for mugs just as Wall Street did before it.

"Abandon hope all ye that enter here."

Apr 08 03:15 PM

[Boldhawk:]

What a novel idea! Don't borrow!
Chinese save nearly 30% or more of their income, which is little enough to start with. They've been doing that for several decades. The only major expense for which they will borrow is buying a home, and their mortgages are normally 20 years max with variable interest.
What most Chinese tell me is that the insecurity of life in China for the greatest majority of the population is such, that they dare not spend much except for essentials.
Considering the property rights in China, I wouldn't buy a home there under any circumstances. Chinese have no choice if they want a family home.

I think we are there in the US.
I stopped borrowing and buying on credit 30 years ago. And I've seen the housing market bubble and dunk several times during my life.

No matter how cheap homes might get to, I don't think I will ever buy one for in the last 40 years I've seen a steady decline of wealth and earnings of the lowest 40% of the population. Which keeps the majority in favor of maintaining the financial system as is, and politicians making excuses.
We'll have to wait till more like 65% are loosing their wealth to the upper 5% before people will take a deep look at the economic system and realize it is not designed for the social benefit, but to keep the financial community's power. Now they own the government, thanks to new Reagan copycat Obama.

Apr 08 11:55 PM

[alaskaeagle:]

The people in the know are spending less and saving more. This is the way it should have been before the crisis. I stated before that Americans were a saving nation but have become a spending nation. They are becoming what made America great. I hope the government follows their lead and abandon their foolish course. Stop the printing press and let the failed companies fail.

Apr 09 12:42 AM

[Ned S:]

I think Thoreau of Walden Pond fame might have a different opinion to that expressed below:

On Apr 08 06:24 Cetin Hakimoglu wrote:

> As i said before, consumers need to do their part by spending
> more and saving less. I;m hopeful the savings rate will go
> negative by the end of 2009 and remain that way. Spendism,
> consumerism, paymentism good for the economy and stock
> market.

Apr 09 06:39 AM