U.S. Consumer Credit - Being Held Up by Government Loans

The 'Helicopter Economics Investing Guide' is meant to help educate people on how to make profitable investing choices in the current economic environment. We have coined this term to describe the current monetary and fiscal policies of the U.S. government, which involve unprecedented money printing. This is the official blog of the New York Investing meetup.


Consumer spending is the lifeblood of the American economy. Before the Credit Crisis, it was responsible for 72% of U.S. GDP. American consumers don't spend the money they have though, but depend on the money they can borrow. Aggregate U.S. household debt (including mortgages) is actually so large that it is bigger than the enormous government national debt. Consumer Credit has been crimped however since the recession began in December 2007 and experienced the longest continual drop in on record in 2009 and the biggest single month drop ever last November (records go back to 1943). Without a big increase in credit from government loans, things would have been even worse.

The Consumer Credit figures don't include mortgages and other real estate related loans. The total outstanding for these other loans was $2.7 trillion as of December 2009. The total in December 2007 was also $2.7 trillion (there was actually a minor $23 billion increase between the two periods). While it looks like Consumer Credit managed to remain flat for the last two years, this doesn't tell the whole story by any means. A big drop in one area was offset by a rise in another, and that took place only because of federal lending. 

There are two types of consumer credit - revolving and nonrevolving. Revolving is mostly credit card debt. Nonrevolving loans are for fixed periods, such as auto loans and student loans. Credit for revolving loans fell 8% between December 2007 and December 2009. The drop was even bigger from December 2008 to December 2009. While credit card debt was falling (there was a period of 15 months with consecutive drops), nonrevolving loans were increasing and have grown 7% so far since the beginning of the recession. While the Cash for Clunkers program certainly fueled car loans in this category, these are not counted as government loans in the credit statistics. Those government loans that are counted, such as student loans, increased by 89% between the end of 2007 and the end of 2009.  All government loans are in the nonrevolving category, without them revolving credit would have experienced a two-year drop, not a 7% gain.

Decreasing Consumer Credit is not surprising. American consumers were over leveraged before the recession began. Banks have been encouraged by regulators to tighten their lending standards and reports indicate that consumers are having trouble getting bank loans. Unemployment has soared, so this should be the case since fewer consumers are credit worthy. The February employment report indicated that approximately a million workers left the labor force between December 2009 and the early part of 2010 (this is the only way the numbers add up). Consumers have also been saving more because of the poor economy.
Despite less credit, a loss of income from less employment, and less money available for spending because of increased savings, the U.S. government has been reporting that consumers are spending more. The Consumer Credit figures indicate that it's not the consumer, but the government that's spending more.

Disclosure: None

NEXT: Will EU Accept Greece's Trojan Horse of Debt?

Daryl Montgomery
Organizer, New York Investing meetup
http://investing.meetup.com/21

This posting is editorial opinion. Like all other postings for this blog, there is no intention to endorse the purchase or sale of any security.

Economic Predictions for 2008

The 'Helicopter Economics Investing Guide' is meant to help educate people on how to make profitable investing choices in the current economic environment. In addition to the term helicopter economics, we have also coined the term, helicopternomics, to describe the current monetary and fiscal policies of the U.S. government and to update the old-fashioned term wheelbarrow economics.

The December 12, 2007 meeting of the New York Investing meetup focused on the likely economic scenarios for the coming year. A video, entitled 'Economic Predictions for 2008' summing up these predictions can be found on You Tube at: http://www.youtube.com/watch?v=bZLsD2DHvLw.

The most important themes cited for 2008 were inflation and recession. Even though inflation is and has been under reported by the U.S. government since the 1980s, it was our opinion the even the manipulated numbers, let alone the real ones, would start to become noticeably higher. We predicted that as inflation was climbing, that the U.S. economy was likely to be gripped by recession (with negative job creation in each of the first 3 months of 2008, it now looks like the U.S. economy was in recession in the first quarter of the year). We also pointed out that it was unlikely the government would be reporting that we were in recession (the government GDP figures are unreliable, just like the inflation figures) until the recession was well under way or even over.

A widening out of the credit crisis with credit card debt, car loans and student loans being impacted was also mentioned in the talk (defaults in all of these loan types were rising significantly in the first quarter of 2008). A big drop in commercial real estate and a continuing weakness in residential real estate were also predicted (foreclosures continue to hit multi-year highs).

Special mention was made of the problems with bond insurers (monolines) and how their condition would continue to deteriorate, but the rating agencies might fail to lower their ratings appropriately because of political pressure (the official lowering of the ratings of these companies could lead to financial chaos). Bond insurer SCA's credit rating was lowered substantially in March 2008, but the rating agencies were still mostly maintaining ratings on the industry leaders MBIA and Ambac.

More bailouts of banks and broker-dealers with the assistance of the Fed was also predicted. The behind the scenes purchase of Country Wide Financial by Bank of America as the secret behest of the Federal Reserve (something denied by Bank of America) was given as an example. The Sovereign Wealth fund purchases of parts of major U.S. financial institutions, certainly with the knowledge and approval of the federal authorities, was also cited as a type of bailout that would continue to take place. Citibank in fact received just such a bailout (for the second time) in mid-January. Of course, the Bear Stearns bailout in mid-March was the most spectacular example of the of the accuracy of this prediction.

Finally it was predicted that the U.S. dollar would continue to drop and this would eventually lead to some form of currency intervention by the G7 countries (most likely late in the year, particularly after the election). Unless the Fed choices to raise rates substantially, this intervention will fail.

NEXT: The First Four Trading Days of 2008

Daryl Montgomery
Organinzer, New York Investing meetup

For more about us, please see our web site: http://investing.meetup.com/21.