American Debt Falls for First Time Since 1954

A very interesting piece in the New York Times which in simple graphical form shows what I call the "subsidization economy". Core activity is putrid but the morphine provided by federal government is immense. Put another way these are the forces of deflation versus inflation playing out. Deflationary forces are swirling to the point that all debt actually fell for the first time since 1954 despite government's best efforts to unleash miles of federal government / central bank fire hoses of borrowing/spending.

Stare at the bottom half of this graphic for a good few minutes.... [click to enlarge]

• THE United States government is borrowing money like never before. The national debt rose by more than a third over a one-year period, far more than it ever did at any time since World War II.
• In the past, when the government became a heavy borrower, there was talk about crowding out private borrowers. But this time, interest rates have remained low and no one seems to be worried about that.
• The reason is simple: Rather than crowding out the private sector, Uncle Sam is now standing in for it. Much of the government borrowing went to investments in financial institutions needed to keep them alive. Other hundreds of billions went to a variety of programs aimed at stimulating the private economy, including programs that effectively had the government pick up part of the cost for some home buyers and some auto buyers.
• This week, the Federal Reserve published its quarterly report on debt levels in the economy. While Uncle Sam borrowed more, others borrowed less. The accompanying chart shows that total domestic debt — the amounts owed by individuals, governments and businesses — climbed just 3.7 percent from the second quarter of 2008 through the second quarter of this year. That is the smallest increase since the Fed started these calculations in the early 1950s.
• Moreover, domestic debt declined in the second quarter, falling 0.3 percent to $50.8 trillion. The figures are not seasonally adjusted, making quarter-to-quarter comparisons risky, but it was the first such decline since the first quarter of 1954, when total debt was less than $500 billion.
• Over the year, total household debt fell by 1.7 percent, and mortgage debt — the largest component of household debt — fell a bit more, at a 1.8 percent pace. This is the 10th recession since the Fed began collecting the numbers, but the first in which the amount of home mortgage debt fell. Some of that decline, of course, came from foreclosures that canceled debt and left lenders with big losses.

Here is a great point and why the US economy is in much more dire straits than people recognize. We've have not borrowed to create productive capacity - we've borrowed to create financial hocus pocus so a tiny sliver of society could gather great wealth. I'm sorry... I mean financial innovation happened and it was great for all of us.

• For most of the last two decades, the biggest increase in debt in America came from financial companies. Much of that debt came from financial innovation rather than actual economic activity.
• Once, a homeowner took out a mortgage, and household debt increased. But by early this decade, the mortgage could be used to secure a mortgage-backed security, and the mortgage-backed security could be used to secure a collateralized debt obligation. Those last two loans counted as financial obligations. There was no more real economic activity, but there was a lot more borrowing.

Of course you will hear from those who benefit from the Federal Reserve largess, that they created lots of economic value. For themselves at least.

• ... other financial borrowing became the equivalent of government debt, at least as seen by the lenders. That was because the money was either borrowed by government-sponsored enterprises like Fannie Mae (FNM), or guaranteed by them or by government agencies.

Watch the shell game play out - can you find the debt? It should be easy to find, the financial elite have moved it onto your grandchild's back. Private financial debt becomes public debt. Presto magic - Houston, we have our "solution": socialization of losses, privation of gains. Oligarchs win while beating their chests of how they've got this crisis "beat!"

Speaking of beat.... the beat goes on - we've only reinforced this game, made the big boys even bigger and let them know they can do whatever they wish because now they REALLY are integral to the system, and the powers that be in D.C. have told the nation they will not be allowed to fail. You can imagine the fallout this will cause in the coming 5-10 years. And when the next disaster happens - you will see the same policy responses. Because it is much better to repeat history than learn from it; especially when those benefiting from the system (and pulling the strings) could care less about the masses in the country, or long term health of the republic. It's their ballgame - don't complain, but please do send in your taxes as a good peasantry.

• Twenty years ago, nonfinancial businesses in the United States borrowed $1.70 for every dollar borrowed by the financial sector, government-guaranteed or not. Now the figure is 68 cents.

Who needs non financial business?

Asians it appears...

Americans? Not so much. We have financial hocus pocus - aka prosperity.

Comments

[conceptwizard]

Nice article!

First, it makes it less likely than most people think that the giant banks will increase the amount of money they're loaning out to individuals and small businesses. Specifically, since loans are made before new infusions of government cash (Kydland and Prescott), there is not a simple cause-and-effect relationship. So the bailouts to the banks will not necessarily encourage them to make more loans. Indeed, the heads of the big banks have themselves said that they won't really increase such loans until the economy fundamentally stabilizes (no matter how much money the government gives them).

A funny thing happened to the inflation theory: Banks aren't lending and proof can be found in excess reserves at member banks


In practice, banks lend money and reserves come later. When defaults pile up, the Fed prints reserves to cover bank losses. Thus, those "excess reserves" aren't going anywhere. They are needed to cover losses. It's best to think of those reserves as a mirage. They don't really exist.


Second, if banks won't increase their lending in response to government funds, then that argues against inflation and for continuing stagnation in the economy.

Third - going beyond what most economists believe or will publicly discuss (and going beyond what I have any background or inside information to confirm) - monetary reformers like Ellen Brown argue that the entire banking system is based upon a fraud. Specifically, she and other monetary reformers argue that the banks have intentionally spread the false reserves-and-credit first, loans-and-debt later story to confuse people into thinking that the banks are better capitalized than they really are and that the Federal Reserve is keeping better oversight than it really is.

Moreover, many monetary reformers argue that the truth of loans-before-reserves is hidden in order to obscure the alleged fact that the entire financial system is built on nothing but air. Specifically, Brown argues that unless more and more debt is continually created, since money creation follows debt creation, what we think of as the money supply will shrink, and the economy will crash. In other words, they say that we a massive, ever-expanding debt bubble has been blown for many decades, and that the myth that banks make loans out of their excess reserves helps to fuel the bubble.

2009 Sep 28 04:53 PM

[Leftfield]

The total debt is unpayable. Collapsed financial "innovation" is being shifted to the "lender" (borrower) of last resort, Washington. This can only be temporary; no one can pay it. It's the last act of "The Financial Innovations That Ate Main St."

2009 Sep 28 04:53 PM

[User 353732]

1. Big Govt does not "stimulate" the private(i.e Productive) economy. It represses it. More stimulation means more unemployment, more business failures and more erosion in the wealth creating capacity and international competitiveness of the US.

2. Big Govt mostly stimulates serial bubbles, income transfers, bureaucratic ossification, and parasitic behavior

3. The Govt does NOT stand in for the true private sector which is the start up, the solo, small and medium sized business, the honest venture capitalist and decent banker. It stands in for grotesquely greedy and corrupt denizens of Wall St and for the shamefully incompetent and irrelevant legacy large industrial companies that ceased creating net value for the economy at least a decade ago.

4. Without substantial, selective and swift deleveraging of the economy, esp the financial engineering and media fantasies economy, Main St cannot recover. The more the Govt thwarts this cathartic deleveraging, the more Main st suffers.

2009 Sep 28 05:33 PM

[Jason Tillberg]

Reminds me of what Biden said back in July.. sic "if we don't spend, we go bankrupt."

www.youtube.com/watch?...

Debt based money system, he's right.

2009 Sep 28 05:43 PM

[Moon Kil Woong]

Banks have been recidivists sucking on the public for money for decades. The author is right that banks are benefitting at the expense of the public. Not just by bailouts but by forcing the taxpayer to shoulder all the risk. When Fannie Mae and Freddie Mac make or buy a bad loan (they do it every day) you are the one that pays and takes the risk. Likewise, offering zirp is a convenient way of letting banks exyend the ARM rates to themselves doling out high rates to others and not paying fairly for the risk but instead gambling on short term borrowing to make the spread.

If you think ARM homeowners are delinquent in their failure to see the implied risk, what do you think of the zombie banks doing essentially the same thing? If zirp rates moved up even 1% you'd hear howls of "pain" and demands the US pay the banks losses yet once again. This is the QE 0% short term interest rate hole Japan fell in and is coupled with radical, inefficient, and bankrupting government spending programs. Either sooner or later government spending must end or rates move up. Both are catastrophic in their implications.

Sadly, it is useless for the public to do the right thing and save if their Hyde government self goes on a rampage and ruins our financial house anyways.

2009 Sep 28 08:51 PM

[E Nuff Sed]

It is bad news that people and businesses are saving more - it is bad for the economy. It is consumption that promotes economic growth. Without consumption the economy can go into a depression. Without consumption there is less need for labor or capital.

The big question in my mind is are people saving to hoard & pay down debt or saving to invest. The former is "dead" money while the latter may be available to create jobs but not as good as direct consumption. Direct consumption ignites demand for labour and capital which in turn leads to employment and greater return on capital and so on.

It is amazing that in spite of the massive increase in government spending there is no or little inflation and the interest rates are so low.

If it wan'nt for as you put it "morphine" provided by the federal govt employment would have been far higher and consumption even lower than it is now.

It is vital to incentivize the consumer to spend now rather than save. That is why we need more programs like cash for clunkers. It is a lot cheaper than starting another world war since that is what it took the world to be pulled out of depression last time around.

2009 Sep 28 10:07 PM

[LilBob]

I expect debt held by consumers to continue to fall for the foreseeable future. Projections of economic recovery based on an import based consumer driven economy are flawed. We now live in an age when jobs are becoming more scarce, economic nationalism is on the rise, and retail investors are-with very good reason-fickle about new investment prospects. As usual, the winners in the new economy will be those who adapt to the times. Real estate can still be a winning investment-if you focus on rental rates on a $/sf basis and offer very small reasonably priced apartments or cottages. The first American hand-tool maker to adopt a "never buy another one again" ad campaign will be able to sell high-end American made tools. The most successful automaker will be the one that creates a low priced hybrid with an engine that runs constantly to recharge the batteries-thereby avoiding the problems associated with plugging a few million hybrid cars into the grid. It's still possible to sell small residential windmills-and the first company to offer a full line of really nice looking units that are architecturally consistent with the large older waterfront homes that so many affluent Americans live in will be a winner.

There's still a lot of money to be made and opportunities are abundant. The question is will the government keep bailing out those intent on oligarchy, or will we see a wave of entrepreneurship that will provide new opportunities.

2009 Sep 28 10:10 PM

[acttang]

Ever since the crisis broke out I have been perplexed by the immediate acceptance of the notion of "bad bankers/financiers vs good citizens". Are we truely naive, or is it just so convenient to blame others for our own fault?

Let's take a look at the reality: there is NO mortagege market other than the one supported by government via Fred and Fan. So I am not very sure what you are suggesting by saying "When Fannie Mae and Freddie Mac make or buy a bad loan (they do it every day) you are the one that pays and takes the risk." Who is the "you" you are referring to? Isn't the dependent society itself, WITH the help of corrupt bankers and financiers, responsible for the big mess it put itself in? Bankers make bad loans, yeah sure, but to who?


On Sep 28 08:51 PM Moon Kil Woong wrote:

> Banks have been recidivists sucking on the public for money for decades.
> The author is right that banks are benefitting at the expense of
> the public. Not just by bailouts but by forcing the taxpayer to shoulder
> all the risk. When Fannie Mae and Freddie Mac make or buy a bad loan
> (they do it every day) you are the one that pays and takes the risk.
> Likewise, offering zirp is a convenient way of letting banks exyend
> the ARM rates to themselves doling out high rates to others and not
> paying fairly for the risk but instead gambling on short term borrowing
> to make the spread.
>
> If you think ARM homeowners are delinquent in their failure to see
> the implied risk, what do you think of the zombie banks doing essentially
> the same thing? If zirp rates moved up even 1% you'd hear howls of
> "pain" and demands the US pay the banks losses yet once again. This
> is the QE 0% short term interest rate hole Japan fell in and is coupled
> with radical, inefficient, and bankrupting government spending programs.
> Either sooner or later government spending must end or rates move
> up. Both are catastrophic in their implications.
>
> Sadly, it is useless for the public to do the right thing and save
> if their Hyde government self goes on a rampage and ruins our financial
> house anyways.

2009 Sep 29 02:18 AM

[John Galt]

It isn't really the "rich" as a group that were bailed out, it was the big corporations and they also happen to be the big donors to the two major political parties. Both sides have bailed them out.

As far as the charts go...

All of that debt on the way up was inflationary ( people used extra "future" money) to bid up asset prices on things like Homes.

Now that we spent that future money... debt is deflationary. We spent part of next year's money... well we get to buy LESS stuff next year.

The government is trying to combat that stuff by THEM spending and THEM taking out extra debt but in reality who funds the government... us. It's a shell game.

If your personal savings goes up 1,000 bucks, but your share of the government debt went up by more than 1,000 bucks ...

Yes, Americans are taking on less debt, but the government took on a whole lot of debt for them!

2009 Sep 29 09:31 AM

[Albert Meyer]

Biden also said, during the VP debate, that we (you and me, taxpayers) should build more schools in Pakistan... The Financial Times reported last week that we gave Pakistan $5.5 billion and have promised another $1.5 billion per annum... regardless who is in power... both parties are bent on expanding our foreign empire (some put the cost at $1 trillion p.a. costofwar.com/)... and in the process bankrupting us here at home... this is a one-party state


On Sep 28 05:43 PM Jason Tillberg wrote:

> Reminds me of what Biden said back in July.. sic "if we don't spend,
> we go bankrupt."
>
> www.youtube.com/watch?...;feature=related<br...
>
> Debt based money system, he's right.

2009 Sep 29 09:38 AM