Monday, March 15, 2010

Total consumer debt continues falling & Consumer debt / GDP perspective

Total consumer debt statistics (all debt including home loans) came out recently and the credit decline continues.  I have produced a couple of graphs to provide some perspective on the data. 

Year over year consumer debt is still falling but at least we are no longer speeding up in our rate of decline.  Looking back you can also see we have not had a period of negative growth any time during the entire data series.

Observing total consumer debt to gdp (both in nominal terms) provides some interesting fodder for discussion. During the 1990's consumer debt / GDP rose <10%. Compare that to the 2000's where the growth rate was much faster. 

The consumer debt / gdp ratio has consistenly risen over the long term.  This ratio cannot rise forever!  Is parity where one starts to encounter serious problems? 

The Wall Street Journal ran a page one article regarding declining debt Friday, March 12 describing how defaults are reducing the total debt load of American consumers.

U.S. consumers are shedding debt at the fastest rate in more than six decades, largely through a wave of defaults, in a trend that underscores the depth of their financial troubles but could also help clear the way for a stronger economic recovery.

Total U.S. household debt, including mortgages and credit-card balances, fell 1.7% in 2009 to $13.5 trillion, the Federal Reserve reported Thursday—the first annual drop since records began in 1945. The debt amounts to $43,874 per U.S. resident.

While some of the decline is from consumer defaults, this is not a 'pain free' method of debt reduction.  Banks become capital deficient and reduce their lending when they take losses in excess of their models.

Longer term it is healthy for the economy to have a lower debt load but the path there is not easy.

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