The Truth About Consumer Credit

by: James Quinn

The Federal Reserve reported consumer credit Thursday afternoon. The amount of consumer debt fell for the 15th time in the last 16 months. The dingbats on CNBC used their dire voices to conclude that the American consumer has taken austerity seriously, is truly cutting back on credit card spending. The MSM spouts the usual drivel about how the consumer is getting tired of being so tight fisted and will begin to spend again.

Why is it that supposedly the best financial minds on TV and Wall Street are so stupid they can’t even look at a basic chart, use a calculator and realize that the consumers have not cut one dime of spending? Are they lying on purpose or are they so clueless a 3rd grader could do better analysis?

Below is a chart showing the dramatic decrease in the change of consumer debt. Now let’s get real. Consumer debt outstanding peaked in 2008 at $2.56 trillion. One and a half years later it has PLUNGED to $2.42 trillion. Yeah the consumer sure has buckled down.

Now this is where Larry Kudlow and Maria Bartiromo would have to actually think before they opened their traps. We know that banks have been writing off credit card debt, auto loan debt and other consumer debt at a 9% rate for the last two years. Everyone get your little calculators out. This means that the outstanding balance of $2.56 trillion at the end of 2008 would have been reduced by 13.5% over the last 18 months because the banks wrote it off:

$2.56 trillion x 13.5% = $346 billion written off.

$2.561 trillion – $346 billion = $2.215 trillion

The outstanding consumer debt as you may have noticed is $2.42 trillion. Is a lightbulb going off over your head yet? The American consumer has ADDED $200 billion of debt in the last 18 months. The delusion continues. Americans have done exactly the opposite of what they should be doing. The savings rate has plunged again and consumers are whipping out their credit cards and buying cars with 13% down and financing for 6 years.

I ask you again. How can the million dollar talking heads on CNBC not do this simple 5 minute analysis before reporting falsehoods to the American public?

Revolving credit (credit card debt) is off 14.9% from the peak. Non-revolving debt (auto, furniture, and other loans) is off 1.5% from the peak.

Consumer Credit May 2010

Disclosure: No positions