The Credit-Wealth Cycle: Consumer Credit Outstanding, August 2009

by: Sold At The Top

Credit has become such a fundamental factor in our lives that we scarcely know how to differentiate it from actual wealth.

That’s one of the basic lessons from the housing and consumption boom… provide enough easy debt for a long enough period and eventually you get an economy that is more levered to assumed future wealth (… often just fictional or wishful thinking) than to current real wealth.

The business-wealth cycle has become the credit cycle.

If either access to credit contracts or households willingness to take on more debt wanes…. or both… it is tantamount to a loss of income… a real loss of wealth.

In August, total consumer credit outstanding (see dynamic chart below) declined by 4.4% on a year-over-year basis… the largest annual decline since June of 1944.

After a stupendous, nearly 20 year run of continuous expansion, it’s obvious that access to credit (widely reported cutting of credit limits) as well as the willingness to access credit are both firmly on the decline.