We Can't 'Spend and Save' Our Way Out of This Recession

Dec. 15, 2008 4:07 AM ETSPY, DIA, QQQ15 Comments

The news media reported the stunning decline in Household Debt last week, but they missed one of the key elements. While it is true that consumers saw the first quarterly decline in the level of debt in the history of the data series, it wasn't because people were paying down debt. Instead, the cause of the decline was mortgage defaults, where the debt is wiped out by transfer to the bank. No, it's not exactly like consumers, on balance, are paying down their debts. The overall growth in Household Debt (primarily mortgage and consumer debt) is stunning (click on chart to enlarge):

Household debt

It is more fair to show the long-term history in terms of annual growth rates, which are still of concern (click on chart to enlarge):

Household Debt Percentage

We have enjoyed a period of accelerating and high growth in mortgage and consumer debt for many years, but it is now falling off a cliff.

The underlying data is available in the Federal Reserve's "Flow of Funds Accounts of the United States", most recently updated through Q3. This provides a great historical reference for all the sectors of our economy. While it is true that Household Debt fell from the previous quarter by $40 billion to roughly $13.91 trillion, it still rose $300 billion from a year ago. Interestingly, though, the overall indebtedness of our country (citizens, corporations and governments) increased by almost $600 billion from the prior quarter and by $1.9 trillion (6%) from a year ago. The main culprits: Federal Government and the Financial sectors.

Many financial pundits declared that consumers are adjusting to the current economic downturn, which is now true, but it wasn't really captured in the recently released data. Given what I have read about the recent moves by the credit card industry (jacking rates, slashing limits) as well as the overall shrinkage

This article was written by

Alan Brochstein, CFA profile picture
Author of 420 Investor
Capitalize on cannabis with the help of a person on top of it for 10+ years

Alan Brochstein, CFA, was one of the first investment professionals to focus exclusively on the cannabis industry. He has run 420 Investor, a subscription-based due diligence platform for investors interested in the publicly-traded cannabis stocks that he is moving to Seeking Alpha, since 2013, and he is also the managing partner of New Cannabis Ventures, a leading provider of relevant financial information in the cannabis industry since 2015. Alan is based in Houston. He and his wife have two adult children.

Before focusing exclusively on the cannabis industry in early 2014, Alan had worked in the securities industry since 1986, primarily with the responsibility for managing investments in institutional environments until he founded AB Analytical Services in 2007 in order to provide independent research and consulting to registered investment advisors. In addition to advising several different hedge funds and investment managers, including Friedberg Investment Management, where he participated as a member of its investment management committee, Alan was also a senior analyst for the independent research firm Management CV. In 2008, he began providing a first-of-its-kind subscription-based service for individual investors, Invest By Model, which offered two different portfolios that investors could replicate in their own accounts. Alan also offered The Analytical Trader at Marketfy, where he used fundamental and technical analysis in a disciplined process to offer specific trade ideas geared towards swing traders.

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