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Deflationary Trends In Consumer Credit

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    December 5, 2012

    A few charts from the New York Fed Quarterly Report on Household Debt and Credit will help put into perspective the deflationary forces facing the Fed.

    Household Debt and Credit Developments in 2012 Q3
     Aggregate consumer debt fell again in the third quarter, by $74 billion, continuing the nearly four-year downward trend in household debt. As of September 30, 2012, total consumer indebtedness was $11.31 trillion, 0.7% lower than its level in the second quarter of 2012 and down $1.37 trillion from the 2008 Q3 peak.

    Mortgages, the largest component of household debt, continue to drive the decline in overall indebtedness. Mortgage balances shown on consumer credit reports continued to drop, and now stand at $8.03 trillion, a 1.5% decrease from the level in 2012 Q2.

    Home equity lines of credit (HELOC) balances dropped by $16 billion (2.7%).

    Non-mortgage household debt balances jumped by 2.3% in the third quarter to $2.7 trillion, boosted by increases of $18 billion in auto loans, $42 billion in student loans, and $2 billion in credit card balances.

    Total Debt

    click on any chart for sharper image

    The deleveraging (deflationary) trend in consumer debt is unmistakable.

    Number of Loans

    There is certainly no jump in the demand for credit card, mortgage, auto, or home equity loans.

    Loan Delinquencies by Type

    Deleveraging of credit card and mortgage debt continues. Some deleveraging is via default. The rest is slow, steady debt reduction with reluctance to take on more debt.

    The increase in student loans (and delinquencies as well) buck the deleveraging trend for two reasons

    1. Student debt is government guaranteed
    2. Student debt cannot be discharged in bankruptcy

    Guaranteed or not, students have no way to pay back their debt as real wages for college grads declines while tuition costs soar.

    Please see Trends in College Tuition vs. Bachelor’s Degree Wages; Demographics of Student Loan Debt History for some very interesting as well as surprising charts on student debt demographics.

    Non-Mortgage Balances

    Auto loans have recovered a bit (primarily because cars eventually wear out). Yet, auto loan balances remain below the 2005 peak.

    The only item preventing a huge plunge in non-mortgage debt is student loans.

    The Fed has been fighting consumer deleveraging with round after round of QE but the above charts show it has not spurred consumer demand for credit. Those rounds of QE have, for now, put a bid on financial assets (stocks, bonds and commodities) but has done nothing positive for the real economy.

    More specifically, those rounds of QE have artificially lowered interest rates, destroying those on fixed income in the process.

    For a discussion as to how Fed policy is tantamount to outright theft for the benefit of banks and the wealthy, please see Hello Ben Bernanke, Meet “Stephanie”.

    Mike “Mish” Shedlock

    Read more at http://globaleconomicanalysis.blogspot.com/2012/12/deflationary-trends-in-consumer-credit.html#GZCzZpSihZ5xCRWy.99

    Images: Flickr (licence attribution)

    About The Author

    Mike Shedlock / Mish is a registered investment advisor representative for SitkaPacific Capital Management. Sitka Pacific is an asset management firm whose goal is strong performance and low volatility, regardless of market direction.  Visit Sitka Pacific’s Account Management Page to learn more about wealth management and capital preservation strategies of Sitka Pacific.

    You are currently viewing my global economics blog which typically has commentary every day of the week. I am also a contributing “professor” on Minyanville, a community site focused on economic and financial education.  Every Thursday I do a podcast on HoweStreet and on an ad hoc basis contribute to many other sites.

    When not writing about stocks or the economy I spend a great deal of time on photography and in the garden. I have over 80 magazine and book cover credits. Some of my Wisconsin and gardening images can be seen at MichaelShedlock.com.