Thursday, December 11, 2008

Some troubling statistics from the Fed today

Households debt falls for the first time...ever (at least since 1952)!

The Federal Reserve released its third quarter flow of funds account. I have never been so anxious to get a release as I was today for the flow of funds account. Third quarter highlights GO something like this:
  • Household net worth declined 4.7%
  • Household debt decreased an annualized 0.8% - a sign of real delevering, given that the 0.8% contraction is in nominal terms and prices rose 1.6% over the same quarter.
  • Total business debt decelerated to a 2.94% pace (down from 5.6%).
  • Federal debt grew an annualized 39% in the third quarter, which is 33.5% above the average 5.5% quarterly debt growth from q2 2007 to q2 2008. This is the biggest surge since 1952.

But there is also a very troubling effect that may emerge, and that is the wealth effect.

The chart illustrates the ratio of household net worth to disposable personal income spanning 1952:Q1 to 2008:Q3. In the third quarter, the share of net worth fell to 5.3% times current disposable income, driven by falling equity and home values. Consumer wealth is falling, and unless housing and equity markets stabilize and grow SOON, wealth will likely fall for two more quarters…at least.

The continuous decline in net worth is likely to hammer consumption, and with that, GDP. It seems like the wealth effect – which is previously questionable as an empirical determinant of consumption – is now quite strong.

Households are watching their stock of housing wealth fall when they return home from work, when they turn on the TV, and when they sit down for dinner. Everyone is facing a deterioration in wealth – home and equity owners alike – and this time around, consumption is bound to decline…further.

There is some serious slack building in this economy. Go Policymakers~!

Rebecca Wilder


  1. I don't see any realistic way policymakers can reverse this.

    The fact is, there's a large amount of belt tightening still available to people once they stop living la vida loca and trying to emulate their favorite MTV crib.

    Once people start thinking about what's important and what they need, consumption can fall much, much, much further. And I think it will.

    Meanwhile, policymakers have gone from a few years ago worrying about the debt bankrupting us, and just a few months before the credit crisis, the Fed chairman declaring our fiscal policy "unsustainable" to suddenly saying it's not important.

    It is important, and it's not something that can be postponed indefinitely. People have been living with this debt load for so long, it's become cultural. But Treasuries are in an absolute speculative bubble right now, and deficits are hitting record levels and rising at record levels.

    There's no way policymakers can keep going with enough stimulus to reverse a consumer downturn, especially if people really start moving into true bunker mode as this crisis continues to worsen, and more and more people worry about their employment situation.

  2. Great news!

    Phony "home equity" and credit-cards do not make True Wealth.

    The "Wealth Effect" has been a long running bogus concept held by those who believe such foolery.

    After all, home equity is nothing more than a banker's concept that lets bankers offer frivolous consumer credit that gets deed holders into debt.

    This is the kind of Structural Adjustment that the economy needs, badly.

    Consumption based on credit cards and inflation driven house prices is no way to run an economy.

    Say is right still!

    All bonehead economists, central bankers and politicians should memorize Say's Law (paraphrased): "[Production-based] supply makes its own demand."

    Americans are watching the devaluation of their phony asset values as they return home from work, when they turn on the TV, and when they sit down for dinner.

    Dummies confuse "Deflation" with Devaluation.

    Deflation happens when a Central Bank (Fed Res) increases reserve requirements, changes loan making requirements and the like to reduce the Multiplier Effect of money creation through credit creation.

    Devaluation happens when street-level prices of assets fall as folks get forced to sell assets (French for "enough") to cover debts.

    The U.S. Economy has been shorted and now that the world sees Americans lacking enough income to pay debt service, those collateral assets used to borrow against have become worth much less.

  3. Hate to be the one to tell but some of us have been in the bunker mode for quite a while. I'm not at all sure of what I do have, even the value of cash. So, what else would you do? It seems more and more to be that we are playing a game of living, not the real thing.

  4. "Hate to be the one to tell but some of us have been in the bunker mode for quite a while. I'm not at all sure of what I do have, even the value of cash. So, what else would you do? It seems more and more to be that we are playing a game of living, not the real thing."

    There's still a ton more bunker mode available- a la people who lived through the Depression Era and pick up eccentricities like recycling paper clips and rubber bands and washing rags for toilet paper for fear of shortages. I could probably cut my expenses by 90-95% if I was only addressing survival needs, and I live a pretty frugal life already. There's tons more room for consumer spending and credit to drop without even touching that kind of extremism.

    What would you do? I guess it depends on what you think will happen.

    If you think this is just a bad recession/depression, hang on to your job at all costs and if you have extra income, try to find investments you think will not go bankrupt during the downturn.

    If you think the political and financial system is so messed up it is going to break and the US is going to either default or hyperinflate or the political system collapses, I can't think of any country that is at less risk right now (not saying the US is fine, just saying it's generally worse everywhere else), so foreign currency isn't safe. And I can't think of anything that would be a good hedge against the risk of sovereign default or hyperinflation or political instability at the same time. I don't know where you'd put your wealth in the worst worst case- it would probably be destroyed. Canned goods and ammunition I guess.

  5. Ala the people who went out and purchased all sorts of guns and ammo during and after the election but for a different reason. Can't really think things will go totally to pot (maryjane or otherwise) but it is amazing the scenarios that are out there.

  6. after the debt...the time to aspire to debt free and be happy...

    ...alla kings horses an alla kings men...


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