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Brett earned his first contrarian investing profits in 2004 when he purchased an obscure investment (at the time): sugar futures. His friends on Wall Street stopped laughing soon enough when sugar rocketed to multi decade highs, illustrating that it indeed pays to be contrary. Brett quickly... More
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  • More Deflation! Consumer Credit Declined "More Than Forecast" 0 comments
    Jul 9, 2010 7:48 PM | about stocks: SDS

    This headline is starting to become a recurring theme.  US consumer credit is in freefall - because, as we all know, the American consumer is FLAT BROKE!

    BusinessWeek reports:

    Consumer borrowing in the U.S. dropped in May more than forecast, a sign Americans are less willing to take on debt without an improvement in the labor market.

    Borrowing that’s increased twice since the end of 2008 shows consumer spending, which accounts for about 70 percent of the economy, will be restrained as Americans pay down debt. Banks also continue to restrict lending following the collapse of the housing market, Fed officials said after their policy meeting last month.

    “The trend in consumer deleveraging is clear as credit has declined 11 of the last 13 months,” Joseph LaVorgna, chief U.S. economist at Deutsche Bank Securities Inc. in New York, said in a note to clients. “Credit card debt continues to be paid down at a heady pace.”

    A couple of months back, we plotted two revealing charts of consumer credit in the US - dating back to 1978.  Here they are, revisited:

    Change In US Consumer Credit

    US Revolving Credit Increase

    At the time, we wrote:

    The sharp decline in revolving credit, which is defined as credit that does not have a fixed number of payments or payment schedule (think credit cards), would appear to support the debt deflation argument (of Robert Prechter and others) that much of the current debt outstanding is going to go unpaid.

    So while the government has engaged in quantitative easing to “ease” the issuing of its own debt, it has not yet offered to print up some greenbacks to pay off the debt of American citizens.

    Thus far, it appears Americans are still choking on their massive loads of accumulated debt, unwilling to take on more credit, no matter what the Fed does.

    If you're scoring at home, it would appear that deflation still holds the upper hand here.  And I don't see how that is going to change, until much of the outstanding credit is reduced and/or destroyed. 

    Disclosure: No positions
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