by Yuriy Anosov
The Federal Reserve reported on Monday that consumer credit had the largest single month increase in almost a decade and seventh consecutive monthly increase in recent history. When you examine the causes of this decade's recession, a myriad of events come up, like subprime mortgages, overleveraged ABS exposure by banks, etc. The primary underlyer in any of these issues was borrowing and easy credit.
(A tweet of mine was recently featured on CNBC showing an example of easy credit.)
As the economy has been recovering, it has been fueled by near zero prime rates and a general ease for consumers to borrow. This is one of the main reasons that the economy crashed in 2007, because there was too much borrowing and the U.S. consumer was living beyond his / her means.
The U.S. is also lucky that Europe is in the midst of a debt crunch, which is keeping the Dollar strong as the Euro is equally as weak. It is painful imagining what the USD/EUR would look like if the eurozone countries were on stable economic ground and did not have the debt problems that we constantly hear about.
The consumer credit numbers released Monday are making me think that there will be a repeat of what happened five years ago, but this time the normal bag of tricks from the Fed is not available to support a phony economy. Interest rates are already at their bottom, and the money supply is already incredibly diluted to cause a significant effect from further easing. What I am wondering is, what major event will set off another major downturn-- much like the collapse of the Bear Stearns hedge funds set off at the beginning of the 2007 recession-- and when this will happen?
What will it take for consumers to control their urge to borrow? While I realize that there are people out there that do believe in saving and making sure that their personal balance sheet is not significantly leveraged, the numbers point out that the majority of people do take advantage of the credit that is available to them, simply because they can.
Disclosure: No positions