Even as the stock market stages a bear market rally, and the banks are showing some small signs of happiness with their newly-received trillions in public money, the signs from the real economy are pointing down, and hard.
Our most recent economic ‘strength’ was an illusion built on borrowing. Unfortunately, our preferred measure for our economy, GDP, counts borrowing-fueled "growth" as though it were real.
For example, if two people live next door to each other, and both earn $50k/year, but one of them borrows a million dollars and spends it all, GDP would measure the borrower as having an economy 20x stronger than the other.
In this week’s newsletter by John Mauldin, he quotes a very interesting set of statistics on consumer credit card borrowings.
Can’t Borrow on Your Home? Whip out the Credit Card!
So, did American consumers cut back on borrowing? Not if they had a credit card! Total loans from commercial banks to consumers grew by $89 billion for the 12 months ending in September. $61 billion of that was credit card debt, and the amount in recent weeks has exploded. Let’s look at this analysis from my favorite slicer and dicer of numbers, data-wizard Greg Weldon (www.weldononline.com). Going with a Halloween theme:
"FAR MORE ‘telling’ is the LOPSIDED degree to which Credit Card balance growth is ‘contributing’ to total growth in Consumer Loans, a sign of intensifying ‘stress’ on consumers, amid accelerating job loss, home price deflation, and equity-market paper wealth devaluation.
"Even the raging Frankenstein stops to note the shockingly UGLY data details:
Commercial Banks, Outstanding Credit Card Balances … SOARED by an eye-opening + $7.1 billion in the WEEK ending October 15th, representing a +1.9% single-week rate of expansion … or … nearly ONE-HUNDRED PERCENT annualized (+98.4%).
"Even more ‘telling’ is the ‘read’ acquired by contemplating the following pair of data FACTS:
- Credit Card Loans, 10 months Sep-07-thru-Jul-08 … up + $29.1 billion
- Credit Card Loans, 10 weeks Aug-08-to-mid-Oct-08 … up + $32.3 billion
"In other words, Commercial Bank ‘exposure’ via the total amount of Credit Card ‘loans’ outstanding has risen MORE in the last ten WEEKS, than it did in the previous ten MONTHS COMBINED !!! Moreover, the growth in the last ten-weeks, $32.3 billion, or about $600 million per ‘shopping day’ since the beginning of August … represents nominal growth of + 9.3% … or … + 48.3% annualized over the last ten weeks.
"According to American Express, delinquencies on credit payments rose to 4.1% of all credit outstanding in the 3Q, up from 2.5% in 3Q of 2007, with Bank of America’s rate rising even more steeply, to 5.9% in the quarter.
"Moreover, the ‘pool’ of loans deemed ‘uncollectable’ rose to a high 6.7% in the 3Q, soaring from 3.6% last September."
What consumer spending there is has been fueled in part by credit card. Greg notes this uncomfortable piece of data: the second largest "merchant-vendor" for credit card use is now McDonalds. This suggests that many consumers are in serious distress when they need to get their $4 Big Mac and fries with a credit card.
This is the problem facing the economy next year. Credit card growth like we have seen in the last few months has never been sustained at such a level, and is unlikely to be this time either. This is especially true as credit card delinquencies have been rising, as noted above.
The next administration is going to be faced with a retrenching consumer, which will likely push the economy even deeper into recession. This will of course result in higher unemployment. In the first year of the next president’s term, he is likely to see another one million people lose their jobs, pushing unemployment to almost 8%.
Peter Bernstein, in his regular letter, notes the rising levels of the DURATION of unemployment. It is now over 9 months, close to 38 weeks. As the recession deepens, this means a lot of people will stop receiving unemployment benefits. Oh, and of course, unemployment is not good for consumer spending. And it will put even more pressure on homeowners behind on their mortgages. And unemployed people do not pay taxes, widening the deficit.
If you thought the recovery under Bush was the "jobless recovery," wait until you see the next version without the benefit of profligate consumer borrowing and spending.
The entire thrust of the bailout is to create conditions where new borrowing can again continue to compound uninterrupted, forever, without limit. But all the signs are telling us that the debt-cycle has hit its limit.
As graduates of the Crash Course, you know how silly the notion of perpetual growth is. As a thinking person, you know how silly it is. Nothing can grow forever.
But our leaders do not know any other way, and so they fight to preserve the status quo, while squandering this golden opportunity to ‘fess up to ourselves and admit the obvious – our former borrow-and-spend consumptive lifestyle has no future.
We need to get back to living within our means, and understand that there’s a world of difference between an economy built on savings and investment and one built on borrowing.
Unfortunately, this distinction is (so far) lost on both political parties, both candidates, and the entire collection of Wall Street financial machinery.
So it remains up to us to spot it and prepare for the consequences as best we can.
Today I spent five hours helping a local person who runs incredible programs build a lodge in the woods that will be used for homeschoolers and after-school kids as they learn about living in the natural world with a deeper sense of place and community. This, at least to me, represents a form of investment that clearly does have a future.
by srbarbour