Less Than It Seems

Maybe the optimists are right: maybe it is wrong to write off the U.S. consumer. Even though their incomes have been stagnant, job prospects have diminished, savings have been under pressure, and bad habits have cost many of them dearly, that doesn't mean they are embracing the new frugality. On the contrary, as the following Real Time Economics report, "Number of the Week: Default, Not Thrift, Pares U.S. Debt," suggests, it appears that many have fallen for the Administration line that things will soon return to "normal" and, consequently, they are still borrowing up a storm:

122%: U.S. household debt as a share of annual disposable income

U.S. consumers are paring down their debts faster than many economists had expected. To understand what that means, though, it helps to know how they’re doing it.

As of the end of March, the average U.S. household’s total mortgage, credit-card and other debt stood at 122% of annual disposable income, meaning it would take a bit more than 14 months to pay it all off if everyone stopped spending money on anything else. That sounds like a lot, but it’s better than it was before: At its peak in the first quarter of 2008, the debt-to-income ratio stood at 131%. Economists tend to see 100% as a reasonable level, so we’re almost a third of the way there.

The falling debt burden conjures up images of a nation seeking to repent after a decade of profligacy, conscientiously paying down mortgages and credit-card balances. That may be true in some cases, but it’s not the norm. In fact, people are making much more progress in shedding their debts by defaulting on mortgages and reneging on credit cards.

Since household debt hit its peak in early 2008, banks have charged off a total of about $210 billion in mortgage and consumer loans, including credit cards. If one assumes that investors suffered at least that much in losses on similar loans that banks packaged and sold as securities (a very conservative assumption), then the total — that is, the amount of debt consumers shed through defaults — comes to much more than $400 billion.

Problem is, that’s more than the concurrent decrease in household debts, which amounts to only $372 billion, according to the Federal Reserve. That means consumers, on average, aren’t paying down their debts at all. Rather, the defaulters account for the whole decline, while the rest have actually been building up more debt straight through the worst financial crisis and recession in decades.

Comments

[Luke]

opting for out of the system. going to all cash, silver, gold--easily convertible. farmland, barbed wire, glass shards, armed guards. welcome to the new world. too bad for all those still buying those silly landrovers, bmws, mercedes, prada, vuitton,etc and other status items that are sooooo yesterday.
Luc

[dearieme]

"122%: U.S. household debt as a share of annual disposable income". Hm: if their annual disposable income halves, that'll push the figure up to 244%, without their borrowing another penny

[sharonsj]

Let me tell you about my experience over the weekend. I went to a local one-time flea market to look for stuff to buy and then resell and I ran into a bunch of second-hand dealers doing the same thing. I also talked to people selling their belongings at the flea market. They all said they or a spouse had lost their job and couldn't find another one. They needed to find another way to earn money or they'd be homeless.

Welcome to the new economy--which is the underground economy. Every one of us said that the only reason we had not gone under was that a lot of the buying and selling was done in cash. Every dealer I talked to, who traveled around the northeast and south, said the number of poor people was growing.

Every town they passed through had an increase in second-hand stores, yard sales, and flea markets. Everybody was trying to stretch a dollar to make a buck. If you recall, I jokingly prophesied this quite a while ago. Well, it's not a joke anymore.

[Luke]

here is the golden opportunity to fuck the FICO scoring system--you know, the one that's only 85% correct some of the time and that is effectively used to screen job applicants (very very relevant and helpful too!), can identify car insurance and home insurance risk without question!. Welcome to the matrix. The choice is yours. opt out or in. Your time is short.

the revolution has begun. you're either in or out (as Heidi Klum would say)
Luc

[Bob Griswald]

The people that I know with poor FICO scores, are also poor employees.
Taking time off to get their electricity turned back on.

Get their nails done, and then buy a secondhand battery for the car."I'm going to be late today- my car won't start"

My FICO score is 830. I pay off my credit cards every month, buy only used cars, and will have my mortgate paid off before I retire.

[Luke]

Bob,
it's nice to know someone so close to God.
I don't have one single employee who hasn't been downsized, been fucked by a corporation and has a great FICO score. Perhaps you're just not looking hard enough.
BTW--doesn't fico end at 800?
mortgage is not spelled mortgate.

[angryfutureexpat]

The real myth is that the debts are gone after they get defaulted on and written off. They just circulate in the secondary and tertiary collection markets for a decade or more.

The view that once we're back to a reasonable debt to income ratio (using these measures) that everything will be A-ok represents a profound failure to see how the real world works.

[robert]

I just can't find the deals in the thrift stores that I could a few years ago. Too many Cadillacs in the parking lot now.

[NOTaREALmerican]

I've seening this behavior for over a year now.

I've been reading - both in the MSM and on (even) the blogs which I trust (Mish, Minyan) about "consumers" paying down debt and saving. This is NOT happenings. Americans are the most optimistic dumbasses on the planet, and until the optimism is completely gone gone gone, they'll spend spend spend every dime they've got.

The government stats are simply reflecting this dumbass optimism. The nobility is hoping (themselves) that if they can support the peasant's optimistic mode long enough our debt fueled economy can continue as it has in the past.

Everybody, from the highest scumbag to the lowest dumbass is living on optimism.