It has been a while since we provided an update to the story of the great credit-card pay-down. According to Federal Reserve data on US household revolving debt, consumer revolving loan (mostly credit cards) balances have declined 9.17% from year-end 2008 through August. This represents an annual rate of - 14%.
Given the high credit card delinquency rates lenders are suffering (5% at last report), much of this balance decline can probably be chalked up to charge-offs. This implies households are not (contrary to popular opinion) actually paying down their debts to any great degree. In the aggregate, non-defaulting households are actually only gradually reducing their debt level. Since we have direct knowledge that at least some people really are paying down their debts furiously, this means others are getting in deeper.
The tenacity of the credit card balances could offer alternate interpretations. It is possible that household finances are in OK shape, and that people are confident about their prospects for the future. On the other hand, it could be that many, many people are desperate for funds to pay the bills, and thus borrowing (instead of cutting spending) in the face of declining income.
Since we opine that we are in a Depression - one of the defining characteristics of which is declining income, we favour the second interpretation. If true, this bodes very ill for the profligate households, and not so good for the rest of us in the months ahead.
Showing posts with label spending cutback. Show all posts
Showing posts with label spending cutback. Show all posts
Saturday, October 10, 2009
Friday, August 28, 2009
Economic Stress Report for August 2009
Once again we've gathered sufficient data to provide an update on the Economic Stress Report. According to our analysis method, the following are the top ten States on our list of economically stressed states. We present them here in order of highest to lowest severity:
South Dakota
Vermont
Ohio
Arizona
Kansas
Montana
Washington
West Virginia
New York
Indiana
Of those States on our watch list, the following have suffered bank closures - another sign of economic stress - since December 2007:
South Dakota (1 closure)
Ohio (1 closure)
Arizona (2 closures)
Kansas (3 closures)
Washington (2 closures)
West Virginia (1 closure)
New York (1 closure)
The past month or so saw two big surprises for us: first was the very rapid fall of Maryland from stressed to 'troubled.' We're not completely convinced that Maryland's situation has suddenly improved for some reason, The State is still on our watch list, but it is no longer stressed, according to our analysis. Even so, we suspect that things will be getting quite a bit worse in Maryland, especially when the Federal Government is forced to commence personnel cutbacks (whenever than might occur), or when large numbers of bank failures finally take place.
The second surprise was Vermont's meteoric rise to runner-up basket case of the Union. We can only assume that Vermonters were somehow heavily over-extended, which quickly came back to haunt the economy in general, but that's just hand-waving. Frankly, we're not exactly sure why Vermont is apparently in such bad shape, so if any of you, Dear Readers, have thoughts, please share.
At this point we're hopping onto our old horse and ranting about South Dakota, still the worst-off State in the Union, according to our analysis. Simply put, we suspect that some political shenanigans are going down to prevent South Dakota from suffering the effects of its zomboid banking system. We have some thoughts on that, which we'll touch on in a future post, but suffice it to say that South Dakota should have had so many bank closures by now, it's not even funny.
Moving on, Ohio continues to hold third place for another month, so we take this as a sign that the State is in bad shape. Presumably the collapse of the American car industry continues to hit the State hard, and we expect that this condition will continue to worsen (perhaps by the eventual failure of Ford, or the re-failure of Chrysler or General Motors). Whatever the case, though, we feel it is a sign that Ohio is experiencing a relatively stable rate of economic contraction, as evidenced by its stable place as #3.
As a final note, we're very pleased to see that an increasing number of those States on our top ten list have suffered bank failures. This we take to be a good sign, perhaps indicating that our stress analysis will have a strong correlation with future bank failures. Time will tell, at any rate; the next report can likely be expected around the end of September.
South Dakota
Vermont
Ohio
Arizona
Kansas
Montana
Washington
West Virginia
New York
Indiana
Of those States on our watch list, the following have suffered bank closures - another sign of economic stress - since December 2007:
South Dakota (1 closure)
Ohio (1 closure)
Arizona (2 closures)
Kansas (3 closures)
Washington (2 closures)
West Virginia (1 closure)
New York (1 closure)
The past month or so saw two big surprises for us: first was the very rapid fall of Maryland from stressed to 'troubled.' We're not completely convinced that Maryland's situation has suddenly improved for some reason, The State is still on our watch list, but it is no longer stressed, according to our analysis. Even so, we suspect that things will be getting quite a bit worse in Maryland, especially when the Federal Government is forced to commence personnel cutbacks (whenever than might occur), or when large numbers of bank failures finally take place.
The second surprise was Vermont's meteoric rise to runner-up basket case of the Union. We can only assume that Vermonters were somehow heavily over-extended, which quickly came back to haunt the economy in general, but that's just hand-waving. Frankly, we're not exactly sure why Vermont is apparently in such bad shape, so if any of you, Dear Readers, have thoughts, please share.
At this point we're hopping onto our old horse and ranting about South Dakota, still the worst-off State in the Union, according to our analysis. Simply put, we suspect that some political shenanigans are going down to prevent South Dakota from suffering the effects of its zomboid banking system. We have some thoughts on that, which we'll touch on in a future post, but suffice it to say that South Dakota should have had so many bank closures by now, it's not even funny.
Moving on, Ohio continues to hold third place for another month, so we take this as a sign that the State is in bad shape. Presumably the collapse of the American car industry continues to hit the State hard, and we expect that this condition will continue to worsen (perhaps by the eventual failure of Ford, or the re-failure of Chrysler or General Motors). Whatever the case, though, we feel it is a sign that Ohio is experiencing a relatively stable rate of economic contraction, as evidenced by its stable place as #3.
As a final note, we're very pleased to see that an increasing number of those States on our top ten list have suffered bank failures. This we take to be a good sign, perhaps indicating that our stress analysis will have a strong correlation with future bank failures. Time will tell, at any rate; the next report can likely be expected around the end of September.
Saturday, May 9, 2009
Credit Card Collapse Report
With today's post we are introducing what we expect to be a recurring report on consumer credit in the USA.
On May 7, the Federal Reserve issued its monthly report on consumer credit. Going beyond the massaged, 'seasonally adjusted' figures, there are some impressive numbers. Apparently in the first quarter of 2009, revolving credit balances - mostly credit cards - fell $60.4 billion, approximately 6%.
This means that not only are people not taking on additional credit card debt, they are paying it off at a rapid rate. If this should continue as a trend, and there are at least two reasons to expect that it will, it will have a serious dampening effect on consumer and business spending.
The first reason to expect the credit card paydown to continue is that credit card issuers are cutting credit lines right and left. Even good customers who have always paid on time are finding letters in the mail informing them their lines have been reduced or their accounts closed altogether.
The second reason is the debtors themselves are feeling less inclined to be debtors. When one's income is declining or even just less certain, all debts become onerous.
It should also be mentioned that part of the decline in debt outstanding is due to writeoffs by lending institutions. These writeoffs also erode the lenders' capacity to issue new loans.
On May 7, the Federal Reserve issued its monthly report on consumer credit. Going beyond the massaged, 'seasonally adjusted' figures, there are some impressive numbers. Apparently in the first quarter of 2009, revolving credit balances - mostly credit cards - fell $60.4 billion, approximately 6%.
This means that not only are people not taking on additional credit card debt, they are paying it off at a rapid rate. If this should continue as a trend, and there are at least two reasons to expect that it will, it will have a serious dampening effect on consumer and business spending.
The first reason to expect the credit card paydown to continue is that credit card issuers are cutting credit lines right and left. Even good customers who have always paid on time are finding letters in the mail informing them their lines have been reduced or their accounts closed altogether.
The second reason is the debtors themselves are feeling less inclined to be debtors. When one's income is declining or even just less certain, all debts become onerous.
It should also be mentioned that part of the decline in debt outstanding is due to writeoffs by lending institutions. These writeoffs also erode the lenders' capacity to issue new loans.
Friday, April 10, 2009
Underestimating the Damage
Thoughtful commentators on the economy are noticing big changes afoot: less dining out; more 'value' shopping; and so forth. So far, they are being rather conservative in their estimations of how far the citizenry is going to be cutting their spending on consumer items. For example, people speak of dining out in the USA being reduced from 50% of the food budget to 40%, returning to the level of 2000.
We believe this is ridiculously over-optimistic. In 1955, dining out was 25% of the food budget. Remember, 1955 was a time of prosperity. Since the world is sinking into a Depression that will last for ten years or more, it would be more realistic to see the luxury of dining out returning to a very low proportion of food spending - say 10%.
In a nutshell, we expect to see this collapse in restaurant and other luxury spending because making it through the next ten years is going to be increasingly a matter of economic survival. More and more of the population will be feeding themselves primarily by way of government food assistance (which does not allow for prepared meals) - as long as such assistance lasts, and most of the rest will sensibly economise by eliminating dining out.
For households not to commence draconian economisations at this point is an invitation to poverty and potential destitution. Such economisations will become more and more evident on a survivor basis. Functioning households will be economical, non-economical households will be dissolved or become economical.
In spite of increasing awareness of deterioration, there is an almost ubiquitous fantasy that recovery is nigh, and when it arrives the population will return to its consumeristic ways. Such a recovery is simply never going to materialise. When, and more importantly if, something akin to economic progress resumes at some point in the increasingly distant future, the economic landscape of the world will be utterly and permanently changed.
We intend to survive this transition and, more than that, experience as much as we can of our idea of the good life. We hope, Reader, the same for you. The severity of the Depression and its consequences must not be underestimated if you wish to be a survivor.
Consider the lessons of the survivors of the Great Depression (1929-1939): pay for everything with cash; make do, mend, use it up, do without; throw away nothing that could be put to use. Our progenitors were altered (often traumatically considering most survivors became compulsive hoarders at least to some extent) by the experience. And remember these are the survivors! Think how much worse it was for the non-survivors!
We believe this is ridiculously over-optimistic. In 1955, dining out was 25% of the food budget. Remember, 1955 was a time of prosperity. Since the world is sinking into a Depression that will last for ten years or more, it would be more realistic to see the luxury of dining out returning to a very low proportion of food spending - say 10%.
In a nutshell, we expect to see this collapse in restaurant and other luxury spending because making it through the next ten years is going to be increasingly a matter of economic survival. More and more of the population will be feeding themselves primarily by way of government food assistance (which does not allow for prepared meals) - as long as such assistance lasts, and most of the rest will sensibly economise by eliminating dining out.
For households not to commence draconian economisations at this point is an invitation to poverty and potential destitution. Such economisations will become more and more evident on a survivor basis. Functioning households will be economical, non-economical households will be dissolved or become economical.
In spite of increasing awareness of deterioration, there is an almost ubiquitous fantasy that recovery is nigh, and when it arrives the population will return to its consumeristic ways. Such a recovery is simply never going to materialise. When, and more importantly if, something akin to economic progress resumes at some point in the increasingly distant future, the economic landscape of the world will be utterly and permanently changed.
We intend to survive this transition and, more than that, experience as much as we can of our idea of the good life. We hope, Reader, the same for you. The severity of the Depression and its consequences must not be underestimated if you wish to be a survivor.
Consider the lessons of the survivors of the Great Depression (1929-1939): pay for everything with cash; make do, mend, use it up, do without; throw away nothing that could be put to use. Our progenitors were altered (often traumatically considering most survivors became compulsive hoarders at least to some extent) by the experience. And remember these are the survivors! Think how much worse it was for the non-survivors!
Thursday, April 9, 2009
Ireland Doesn't Need a Bailout?
Anyway you look at it, Ireland's economy is in shambles. The formerly fastest growing member of the EU is now the fastest shrinking - with a rosy, Government forecast of -8% change in GDP this year.
Finance minister Lenihan defiantly claims the nation does not need a bailout from the EU. He defiantly claims that in spite of his staggeringly expensive (1/2 annual GDP equivalent) rescue of the Irish banks, "there will be no bailout of the banks."
The government, not having the luxury of being able to print up money, is being forced to raise taxes to service the new debt as well as meet existing obligations in the face of what would otherwise be rapidly declining tax revenues. This, of course, will soon be seen as a fatal policy blunder. Raising taxes in a Depression is, as everyone who was paying attention in economics class knows, a big no-no. It is taking money out of the hands of the people when they need it most.
Mr. Lenihan is merely a crony and cannot exactly be blamed for this misstep. Presumably, some policy wonks in the Irish Finance Ministry - taking a cue from the Yanks perhaps - are thinking (in Irish Gaelic, of course), "If we reliquify the banks, they will lend again and people can buy houses again, 'n stuff." So pinching the average worker is an acceptable trade-off.
We'll bet any taker that Irish banks won't do squat to revivify the Irish economy, and that the masses are going to have to cut spending even more. We sense a vicious cycle forming.
The end state will be Ireland out of the EU (sans bailout) and its economy worse off than it has been in decades. Emigration will not prove the safety-valve it has in the past as the former destination lands will look less kindly on newcomers. We suspect Ireland is where damage from the 2007 Depression may be most acutely felt, completing the rags-to-riches-to-rags cycle.
Finance minister Lenihan defiantly claims the nation does not need a bailout from the EU. He defiantly claims that in spite of his staggeringly expensive (1/2 annual GDP equivalent) rescue of the Irish banks, "there will be no bailout of the banks."
The government, not having the luxury of being able to print up money, is being forced to raise taxes to service the new debt as well as meet existing obligations in the face of what would otherwise be rapidly declining tax revenues. This, of course, will soon be seen as a fatal policy blunder. Raising taxes in a Depression is, as everyone who was paying attention in economics class knows, a big no-no. It is taking money out of the hands of the people when they need it most.
Mr. Lenihan is merely a crony and cannot exactly be blamed for this misstep. Presumably, some policy wonks in the Irish Finance Ministry - taking a cue from the Yanks perhaps - are thinking (in Irish Gaelic, of course), "If we reliquify the banks, they will lend again and people can buy houses again, 'n stuff." So pinching the average worker is an acceptable trade-off.
We'll bet any taker that Irish banks won't do squat to revivify the Irish economy, and that the masses are going to have to cut spending even more. We sense a vicious cycle forming.
The end state will be Ireland out of the EU (sans bailout) and its economy worse off than it has been in decades. Emigration will not prove the safety-valve it has in the past as the former destination lands will look less kindly on newcomers. We suspect Ireland is where damage from the 2007 Depression may be most acutely felt, completing the rags-to-riches-to-rags cycle.
Wednesday, February 4, 2009
Increase in Savings Rate Explained
Fortune Magazine just published an article bemoaning the lack of consumer spending and (what is to the author) a paradox of increasing savings rates. Mr. Colvin, the author, apparently does not get out much, because anyone with eyes to see can tell you why savings rates are increasing.
People are 'saving' only because they are paying off their debts. They are not paying off their debts because they want to, but because they can no longer refinance their debts with home equity loans, low-rate promotional cash advances, or even just plain juggling their balances between credit lines. Banks are relentlessly cutting lending. Credit lines are cut and new loans are harder to get. In order to pay off their debts, people must cut their spending on whatever they would have bought if they didn't have to pay off their debts. Consumption declines, 'savings' increases, end of story.
The dimness represented here by Mr. Colvin and other writers in the leading financial publications is disconcerting. If the investing class continues to be as misinformed in the Depression as it was during the Mania beforehand, recovery will be very far off indeed.
People are 'saving' only because they are paying off their debts. They are not paying off their debts because they want to, but because they can no longer refinance their debts with home equity loans, low-rate promotional cash advances, or even just plain juggling their balances between credit lines. Banks are relentlessly cutting lending. Credit lines are cut and new loans are harder to get. In order to pay off their debts, people must cut their spending on whatever they would have bought if they didn't have to pay off their debts. Consumption declines, 'savings' increases, end of story.
The dimness represented here by Mr. Colvin and other writers in the leading financial publications is disconcerting. If the investing class continues to be as misinformed in the Depression as it was during the Mania beforehand, recovery will be very far off indeed.
Saturday, January 10, 2009
Is Medical Care a Necessity or a Luxury?
We do not propose to answer this question on an ethical basis, but on an experimental one. We believe that the 2007 Depression will cut into incomes so severely that social observers may get an answer to the question based on patterns of spending cutbacks.
It is irrelevant whether medical costs are paid out-of-pocket, through insurance schemes, or by a government. In the coming years there are going to be severe budgetary constraints at all levels in society from the household to the United Nations. Whether the decisions are made individually or politically, the issue of whether to spend on medical care is going to loom ever larger.
This also raises the question: if medical spending is to continue, what spending will be sacrificed? Obviously, goods and services which are noncontroversially considered luxuries such as travel, dining out, and entertainment may be first in line to the scaffold. After that, electronic and durable good purchases may be deferred or forgone. Then we are getting into the 'meat and potatoes' - necessities.
The USA has, notoriously, the most expensive and least broadly available health care system in the world. If the same or more money is spent, will the USA become a nation of people metaphorically taking each others' blood pressure? In 2008, Medical spending was 17% of GDP. If GDP falls 50%, will medical spending become 34% of GDP? Or will priorities change?
If the axe falls on medical spending the implications are quite dramatic. Workers and investors in the industry have been used to steady (often lucrative) work, and reliable returns. What will the consequence on consumers be? Will even more Americans find themselves uninsured and without access to anything but the most primitive services?
Many questions...with many answers forthcoming in the years ahead.
It is irrelevant whether medical costs are paid out-of-pocket, through insurance schemes, or by a government. In the coming years there are going to be severe budgetary constraints at all levels in society from the household to the United Nations. Whether the decisions are made individually or politically, the issue of whether to spend on medical care is going to loom ever larger.
This also raises the question: if medical spending is to continue, what spending will be sacrificed? Obviously, goods and services which are noncontroversially considered luxuries such as travel, dining out, and entertainment may be first in line to the scaffold. After that, electronic and durable good purchases may be deferred or forgone. Then we are getting into the 'meat and potatoes' - necessities.
The USA has, notoriously, the most expensive and least broadly available health care system in the world. If the same or more money is spent, will the USA become a nation of people metaphorically taking each others' blood pressure? In 2008, Medical spending was 17% of GDP. If GDP falls 50%, will medical spending become 34% of GDP? Or will priorities change?
If the axe falls on medical spending the implications are quite dramatic. Workers and investors in the industry have been used to steady (often lucrative) work, and reliable returns. What will the consequence on consumers be? Will even more Americans find themselves uninsured and without access to anything but the most primitive services?
Many questions...with many answers forthcoming in the years ahead.
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