Consumer Credit Sees Record Plunge: Need Another Indicator?

It is no secret that the U.S. has a consumer economy. More than 2/3 of GDP is directly derived from consumer spending. The staggering numbers in the weekly. U.S. lay-offs reports shows that the U.S. economy is shedding jobs at a Depression-like rate. Meanwhile, the monthly jobs report from the Bureau of Labor Statistics tells us nothing, since those manipulated numbers have no connection with the real world.

As I wrote two days ago (see “The Myth of the Job-less Recovery”), there is no such thing as a “job-less recovery”. The U.S. economy has been able to imitate an “economic recovery” in previous downturns, through the success of its propaganda-machine in inducing U.S. consumers to take on more debt – and create the illusion of economic growth through excessive borrowing-and-spending. Similarly, if I was to lose my job, but manage to borrow a million dollars, I could certainly demonstrate the appearance of affluence to my neighbours.

With over $57 trillion in total public and private debt, those days are over in the United States. With a crescendo of talking-heads proclaiming that a “U.S. recovery” has already started, recent reports of U.S. consumer credit show that this claim is nothing short of absurd.

Total U.S. consumer credit plunged by $21.4 billion in July alone – the biggest drop on record, and the sixth, consecutive monthly decline. Meanwhile, the plunge in consumer credit in June was revised 50% higher from over $10 billion to over $15 billion. At the same time, according to BNN, a survey of U.S. banks shows that 1/3 are planning further tightening of their lending standards, and none are planning on loosening credit.

“It is one more sign that consumers are not going to be contributing much to the economy for the balance of the year and probably for a good part of next year,” said Bernard Baumohl, chief economist for The Economic Outlook Group, at Princeton. This is a gross understatement.

In fact, U.S. consumers are contributing nothing to the U.S economy. Consumer spending has fallen over the last year, and “real” consumer spending (i.e. spending adjusted for inflation) has been falling every month this year – even with an endless string of retail “sales” and gimmicks like the “Cash-for-Clunkers” program.

I already pointed out in my previous commentary that no economy can have real, economic growth without job-creation accompanying it. Yet the U.S. propaganda-machine claims to have a legion of (anonymous) “experts” all in agreement that a “job-less recovery” has begun.

With vast numbers of jobs being lost, and the amount of credit available to Americans collapsing at the greatest rate in history (and with U.S. banks planning further cuts in credit), there is zero possibility of any real growth in U.S. consumer spending.

So what will we hear next from the propaganda-machine's “experts”? Is the U.S. consumer economy about to experience a “job-less and consumer-less recovery”?

At some point, the sheer lunacy of what these “experts” are trying to get us to swallow must trigger an inevitable “gag” reflex. Keep in mind that this is the same group of experts who were “surprised” at the bursting of the U.S. housing-bubble (the biggest asset-bubble in human history). For the contrarians out there, the simple fact that all these “experts” are predicting a U.S. recovery is the most certain evidence that the U.S. economy is about to start its next leg down.

As many other commentators have observed, during the (first) “Great Depression”, the U.S. economy did not experience a decade of steady, economic deterioration. Instead, that depression marked the most dramatic “roller-coaster” ride it has ever experienced (until the current collapse). Severe plunges were marked with sharp reversals – where on several occasions there were genuine periods of positive economic activity.

However, the overall, downward momentum of the economy overwhelmed these positive surges again and again, with the result being a decade of serious, economic decay. Arguably, the brief upward surges were just as damaging as the downward moves – since millions were duped into believing that “the worst is over” (something we hear currently on a near-daily basis).

In contrast, there has been no positive economic activity in the U.S. in this Depression, merely some less-bad declines. However, these “improvements” (as with the BLS's jobs report) are heavily contrived in one manner or another.

For instance, the “experts” have been duped into believing that the U.S. housing sector has “bottomed”, and the inventories of unsold homes are “declining”. This has been accomplished through nothing more than U.S. banks deliberately keeping millions of already-foreclosed/repossessed homes off the market – a totally artificial (and obviously temporary) reduction in supply.

As I pointed out in “Delinquent U.S. mortgages break record AGAIN”, the U.S. is on pace for more than 4 million foreclosures/repossessions this year alone, yet U.S. banks are on pace to sell less than 2 million foreclosed/properties this year. How reliable are any “experts” if they can be duped by maneuvers as simple and obvious as this?

Thus, the U.S. has a consumer economy which is lacking both employment income and credit amongst its consumers. At the same time, a group of thoroughly discredited, economic-charlatans are all predicting an “economic recovery”. You don't need to be an “expert” to see where the U.S. economy is headed.

Comments

[theblindtib...:]

I take solace in seeing that the lowly consumer now knows what is going on even if the administration refuses to acknowledge that a 'new paint job" will not fix a house that is structurally damaged. The government is bankrupt and lost in a talking head sound loop espousing the correctness of their fiscal policies, while the average citizen, the real canary in the coal mine, has just fallen off his perch.

Sep 10 07:42 AM

[Michael Clark:]

We are going to be saving for the next decade. That new snowmobile, the new video games for the kids, the vacation to Vegas...they're just going to have to wait.

We're starting to sober up now. Life is about more than just collecting toys we don't need so we can give them away to the Salvation Army two years later.


On Sep 10 07:32 AM CautiousInvestor wrote:

> I questioned yesterday why is everyone surprised by this widely expected
> development and why is there uncertainty over how it's being achieved.
>
>
> Comsumers saved $38.2 biilion during July, or around 4.2% of personal
> disposable income, and retired $21.5 billion of debt. On the surface,
> there is nothing to suggest defaults or writedowns.
>
> Wait until the savings rate goes to 8% to 10%

Sep 10 07:55 AM

[Roger Knights:]

"As many other commentators have observed, during the (first) “Great Depression”, the U.S. economy did not experience a decade of steady, economic deterioration. Instead, that depression marked the most dramatic “roller-coaster” ride it has ever experienced (until the current collapse). Severe plunges were marked with sharp reversals – where on several occasions there were genuine periods of positive economic activity.

"However, the overall, downward momentum of the economy overwhelmed these positive surges again and again, with the result being a decade of serious, economic decay. Arguably, the brief upward surges were just as damaging as the downward moves – since millions were duped into believing that “the worst is over” (something we hear currently on a near-daily basis)."

I agree with the analogy of an overriding cycle. I can't understand why the mainstream can't see that the undertow of debt is more important than a rising wave or two. Those rising waves of the ordinary business cycle are mere twitches superimposed on the larger cycle of deleveraging, default, devaluation, deflation, and doom.

Sep 10 08:49 AM

[Hans111:]

hey why don't you believe your own govt guys. they said it's over. What they didn't say is that the dollars buying power is going to be cut in half shortly. But yes, at one point after several cut in half's, the jobs will go back to the US

Sep 10 08:56 AM

[John Galt:]

> Meanwhile, the monthly jobs report from the Bureau of Labor Statistics tells us nothing, since those manipulated numbers have no connection with the real world.

You made me laugh with that one Jeff. Way to be blount about it. I can just picture some guy saying that all in a sarcastic Saturday Night Live voice. Somebody like Will Ferell. Could you picture Will Ferell saying that?

> As many other commentators have observed, during the (first) “Great Depression”, the U.S. economy did not experience a decade of steady, economic deterioration. Instead, that depression marked the most dramatic “roller-coaster” ride

Good Point.

> since millions were duped into believing that “the worst is over” (something we hear currently on a near-daily basis).

Obama said that we are in a "crisis of confidence". It should be no surprise that the government is manipulating the numbers to make everything look better than it is.

All that debt is just pouring gasoline into the fire as Rome Burns. "New Normal", "Double Dip", "W shaped recovery", "square root shaped recovery", job creation "next year" all points to the same destination.

Sep 10 09:15 AM

[conceptwizard:]

data.bls.gov statistics

Some employment numbers you won't hear from the MSM

16 years or older not in labor force

Aug 1999 67.984 million

Aug 2009 81.509 million

An increase of 13.5 million

Full time employees

August 2008 121.556 million

August 2009 112.262 million

That's a decrease in full time jobs of 9.294 million in 12 months

Hard to dispute the US Government stats. The consumer is gone because of lost jobs, indebtedness, housing equity vaporization. There have been 1.1 % job increase from 1999-2009 in the private sector. Don't expect the consumer back until Obama focuses on real job creation via solid long term employment.

His focus on Health care before jobs is appalling and nothing short of irresponsible.

Sep 10 10:41 AM

[NUCLEAR1929:]

its clear like spring water, markets are dead

Sep 10 10:45 AM

[newamericanow:]

What was needed all along was darwinian economics that allowed the survival of the fittest banks and no bank bailouts. The USA hould have invested in massive manufacturing capabilities with the addition of dynamic tarriffs on foreign made goods that would equalize the American worker and finally put our foot down on world slave labor. Then end the incremental tax code with a cross the board same tax percentage for all and abolish many of the personal deductions commonly used by the wealthy to get out of paying taxes. Labor would have to give up the huge pentions that now weigh down the big corporations , however, the corporations would not be able to outsource to foreign labor and still sell their goods hear without a massive penalty or tax. The banks should not be allowed to charge 20-25% interest on credit cards So this will be decrease substantially but still allow banks to make profits just not overwhelmingly. Same for the Pharmacutical industry...If they use taxpayer dollars to fund new drug development then they will give the American people a discount for the investment. These are some common sense approaches that our government should be doing. This is the change that we needed.

Sep 10 11:13 AM

[The Recusant:]

And the pendulum swings. The banks lent money to the consumers with no guarantees and when their exuberance in greed and profit taking broke the economy, they've gone to the other end and have limited their loaning and credit. The avarice of those in charge is blinding them to the reality that when companies and the consumer can not use credit or borrow, the system breaks down. First the consumers will belly up, then the companies that they buy from, and eventually the ones who were holding all the "stimulus" marbles--the banks themselves. Now that's stupidity.

Sep 10 11:26 AM

[Asbytec:]

I apologize for my rant, and being off topic...<sigh> Just tired....

Sep 10 11:33 AM

[Hans111:]

If the real debt was say 30 trillion that's 30 x 10^12 divide that in 300 mio people 300 x 10^6
that's 100'000 bananas for each and every one including the homeless toddlers etc.
I think per avg household that's 350-400k.
It's a lot to pass on when we die...
I think we should be ashamed but correct me if I'm wrong please

Sep 10 11:36 AM

[enigmaman:]

you make sense, the facts make sense, what I see makes sense and thats why retail investors are MIA, the main market players can only prop up the markets so long without the retail investor, sooner or later something has to give, if its not the retail investor it will be the main players who will put a lid on the markets once they have placed all their short positions, normally this is when main street ventures back in the market, but this time sanes main street they will feed off what they have which is each other, we can only hope

Sep 10 12:02 PM

[Dave Wrixon:]

You are sort of right and at the same time completely wrong.

You seem to expect Uncle Sam to sort things out. Unfortunately, he will probably just dig a much bigger hole.

Unfortunately, Joe Six Pack is going to have to work his way out of the hole, but before he can do that in most cases he is going to need fresh investment. To get this Joe Six Pack is going to have to prove he is the most effective and productive worker, and competitive on cost. How is he going to do this? Well, the government is going to have to do something about education for sure, but the government cannot buy its way out of debt.

Unfortunately, the truth is that Joe Six Pack is probably going to have to break his back below the market rate to buy the credibility he needs to get that investment whilst receiving inferior social benefits and medical cover. Thatcher turned think around in Britain but it was no place to sick. The Chinese and the Indians have to slog hard for modest reward and the truth is most Americans will probably end up having to do the same, at least until the economic fundamentals have been turned around. That bad new is with the wrong leadership, which you have in spades, Joe could be laboring without see and real benefit for decades.


On Sep 10 11:01 AM Asbytec wrote:

> On Sep 10 06:58 AM Dave Wrixon wrote:

Sep 10 02:25 PM

[Billy Ford:]

pompano and shark need to wake up. we are truly in different times and you cant point to some chart in 91 and try to find some correlation with that of today. Consumers will continue to delever and we will never meet the growth expectations that the market has already priced in. I dont know when, but I sure would be putting my seat belt on now.

It is not that we are all doom and gloom...I would love to be optimistic about out country's economy, but enough is enough. Some of us are tired of the Fed and the media playing mind games attempting to make us feel all warm and fuzzy insideh hoping we will go back to our old American ways of buying stuff and then trying to figure out how to pay for it later. This time it is different, and I personally believe that this will make us stronger, but if we dont learn any lessons from our mistakes, we will continue to have these brutal cycles every few years

Sep 10 02:41 PM

[Donald Ingram:]

WELCOME TO "THE GREAT DEPRESSION 2.0".

Or if like it simple - GD 2.0

These are depression numbers being bandied about. So, lets all start calling it for what it is - a DEPRESSION!

Sep 10 02:52 PM

[dirtyharry:]

If enough people get tired of a whiner, he can be booted out. Call it what you want.

Back in 2006 I was auditioning to become a member of an association for professional networking. It included real estate people (like me), attorneys, insurance people, and other various professions. At one point several people were asked their opinion on housing prices. Two real estate people answered in front of me, explaining how everything is fine, and that we might see prices level out for awhile.

I then spoke out. I was more in the mortgage side of the business at that time. I explained the subprime problems (remember, this is 3 years ago before the big collapse), the portfolio product issues, and the Option ARMs that are only now about to start resetting en masse. I then explained that places like Los Angeles (my location), Florida, Las Vegas, and Phoenix were going to experience price declines that could be "greater than 30%".

Not only did the entire group bark me down for such blasphemous statements, but afterwards the two heads of the group told me that I was a "bad fit" for their association. In the end, sadly, my predictions were TOO CONSERVATIVE and the damage was even worse than I had thought it would be.

It's not "America" that's being bashed here - it's the policies of the Federal Government. First they create big messes, second they gloss it over and lie about them being the culprits, and finally they create new messes with their new programs (bailouts, cash for clunkers, etc). Really now, is this what you're defending?

If we don't criticize these bad policies and blindly accept them, there will be no chance of ever seeing them corrected. As it is it's tough getting things to actually change - for the better. Imagine if we were totally silent. The Federal Government has earned every ounce of criticism they are currently receiving, and some.

Sep 11 02:02 AM

[NickelMan:]

My head is not in the sand. I agree with most of what you say. I don't believe the mistakes or choices our elected officials are making are intentionally malice. We are in a complicated situation, and in a very complicated time. They are just not sure of how to deal with it. No matter how you slice it they are arguably some of the best educated and most intelligent people in our society. Hopefully they will get it right soon.
[edited for violations of TOU - SA Editors]

Sep 11 02:48 AM

[Asbytec:]

On Sep 10 02:25 PM Dave Wrixon wrote:

> You are sort of right and at the same time completely wrong.

Dave, I guess I do expect the government to step in when spending and job losses kill demand for goods and services. Call me old school. But they really are kind of in charge of our public primary school system.

I guess if you're gonna have an immense federal reserve banking system and it's associated financial institutions flooding the world with liquidity. The government might have to step in when the whole thing comes tumbling down. Pouring in money...tax money, unfortunately, is how one saves such a system irregardless of whether or not we like it...which we don't. But, that's the system we have and that's how it gets rescued, I'm afraid...through government intervention...details aside. (Though I favor collapse, in theory...in practice so many common folk would be hurt.)

As for Joe Six Pack and his work ethic and wages, well, we could do pages on that. But, let's focus on credit, I'll try to remain on topic this time. Broadly speaking, the American consumer has fueled the global economy with those credit cards we received in the mail during the 80's. Those days are over, thank goodness...so a slump in consumer credit is expected. I strongly suspect it will never regain the levels it once enjoyed and the global economy will grudge along at a slower, more sustainable pace of growth.

Since credit levels should remain deflated for some decades to come, cash should carry a heavier load. So, what to do about inflation..debasing the dollar? Inflation vs savings interest in liquid assets is another evil, the propensity to save is wiped clean. This is one reason I favor this period of deflation, not for business sake...but for Joe's. But, that's another story for another day.

I am of the camp excessive consumer credit is evil, anyway, so...I am happy to see if plummet. This credit crisis has brought home a few roosters to roost and opened more than a few eyes. Yes, I agree it will be decades before we can fully recover. The trick is, how will we recover? More of the same synthetic wealth built upon the backs of working Americans paying off debt or through real production, savings, and real wealth? I dislike the term "wealth effect." Its misleading. I'd rather be actually wealthy with a currency capable of holding onto it. But, that requires a different banking system and currency standard, as you probably know.

By the way, I reported my own previous last post to the site managers...it was a bad day rant and nothing more. They removed it. I think what I said was true, just said badly...

Sep 11 02:50 AM

[Asbytec:]

Oh, Dave, I'd like to get your take on this. I read in another thread the Fed is debasing the dollar to validate stock prices. Hows that for an economic fundamental? LOL My goodness, if that is half true...we're so screwed.

I'll say it again, this thing is bigger than most evening news watchers care to know. I just don't feel it's over, especially when the head of the ECB visits Zimbabwe, when credit lines fall, and an assortment of other reasons...like gold and oil volatility and dollar woes...QE, you name it...such drastic measures should speak the the seriousness we're in. I just don't think a few green shoots and short term government stimulus are gonna pull us from this nose dive...not just yet.

Sep 11 02:59 AM

[SA Editor M...:]

Some comments have been removed from this thread for egregious violations of our Terms of Use - notably, for personal attacks on others. Our thanks to those who reported abuse.

Oct 09 08:43 PM