This is how it all starts.
The $10.1 billion gain in non revolving is the key.
That, along with housing, is the borrowing to spend the drives consumer credit expansions.
And the ongoing federal deficit spending continues to add to savings via less credit card debt that’s generally used for current consumption.

It’s only one month, and the series has volatility, but it does fit with the financial burdens ratios.

Without the external risks, the Obama boom that began in Jan 09 (before he added a bit with his fiscal package) looks intact and ready to accelerate.

Unfortunately there are risks.

Taxes are scheduled to go up at year end if gridlock isn’t broken. And even if they do extend the current tax structure, it’s not a tax cut, just not an increase.
Congress is bent on ‘paying for’ everything and proactively reducing the federal deficit, one way or another, including paying for not letting taxes rise should that happen.
The sustainability report is due Dec 1 which could further scare everyone into more proactive deficit reduction.

This kind of stuff. There are probably enough votes for the balanced budget constitutional amendment to pass Congress:

Sen.-elect Paul: GOP must consider military cuts

November 7 (AP) — Republican Sen.-elect Rand Paul says GOP lawmakers must be open to cutting military spending as Congress tries to reduce government spending.

The tea party favorite from Kentucky says compromise with Democrats over where to cut spending must include the military as well as social programs. Paul says all government spending must be “on the table.”

Paul tells ABC’s “This Week” that he supports a constitutional amendment calling for a balanced budget.

The rising crude oil price is like a tax hike for us.

The $US could head north in a ‘hey, QE doesn’t in fact weaken the dollar and we’re all caught short with no newly printed money to take us out of our trade’ rally, further fueled by the automatic fiscal tightening that comes with the modest GDP growth reducing spending via transfer payments and increasing tax revenues, making dollars ‘harder to get.’

Also an even modestly growing US economy does attract foreign direct investment as well as equity investors in a big way.
And, real US labor costs are low enough for us to be exporting cars- who would have thought we would have sunk this low!
On the other hand, higher crude prices does make $US ‘easier to get’ overseas and tend to weaken it fundamentally.
The falling dollar was supporting a good part of the latest equity rally- better foreign earnings translations, more exports, etc.- so a dollar reversal could create a set back for the same reasons.

China is looking at maybe 10% inflation, and their currency fix seems to be closer to ‘neutral’ as their fx holdings seem to have stabilized.

It’s possible their currency adjustment has come via internal inflation, and now the question could be whether and how they ‘fight’ their inflation. In the past inflation has been a regime changer, so political pressures are probably intense.

Euro zone austerity is resulting in ‘political imbalances’ as Germany sort of booms and the periphery suffers.
It’s all muddling through with high and rising over all unemployment, modest growth, and the ECB dictating terms and conditions for its support.

Conclusion- clear sailing, Obama boom intact, unless the ‘external’ risks kick in. The most immediate risk is a dollar rally, closely followed by fiscal tightening

Consumer Borrowing Posts Rare Gain in September

November 5 (AP) — Consumer borrowing increased in September for the first time since January even though the category that includes credit cards dropped for a record 25th straight month.

The Federal Reserve said Friday that consumer credit increased at an annual rate of $2.1 billion in September after having fallen at a rate of $4.9 billion in August. It was only the second increase in the past 20 months.
Americans have been reducing their borrowing for nearly two years as they try to repair their balance sheets in the wake of a steep recession and high unemployment.

For September, revolving credit, the category that includes credit cards, fell for a record 25th consecutive month, dropping by an annual rate of $8.3 billion, or 12.1 percent.

The category that includes student loans and auto loans, rose by $10.4 billion, or an annual rate of 7.9 percent.

The $2.1 billion rise in overall borrowing pushed consumer debt to a seasonally adjusted $2.4 trillion in September, down 2.9 percent from where consumer credit stood a year ago.

Analysts said that consumer credit is continuing to be constrained by all the problems facing households, including high unemployment and tighter lending standards on the part of banks struggling with high loan losses.

Households are borrowing less and saving more and that has acted as a drag on the overall economy by lowering consumer spending, which accounts for 70 percent of total economic activity.

The economy, as measured by the gross domestic product, grew at a lackluster annual rate of 2 percent in the July-September quarter, up only slightly from 1.7 percent GDP growth in the April-June period.

23 Responses

  1. So even though the private sector has barely de-leveraged, it’s borrowing once again? Boggles the mind.

    So the recovery will be just as jobless as the last jobless recovery, and the next crash will just be even bigger than the 2008 crash. Around 2015 or so (whenever the next debt fueled crash kicks in) we’ll end up with 20% unemployment?

    1. the financial burdens ratio tells me the de-leveraging has been substantial, as happens with large enough deficit spending.

      whether private credit expansion is in the process of driving gdp growth north of 5% any time soon is the question

      i think yes, if the external shocks i mentioned don’t get in the way.

  2. Warren can you post on how QE2 will not increase the money supply. What are your thoughts on pomo when the fed buys securities from primary dealers it flows into the stock market. I am very confused

    1. qe increases ‘money supply’ narrowly defined. however it has no effect on the real economy apart from as discussed here.

      it tends to lower the term structure of rates some, which offers some support for the stock market, which fundamentally expresses a risk adjusted rate of return.

      however qe also removes interest income from the economy, which is not good for stocks or risk assets.

      all in it does little if anything. as someone said, if it worked Japan would be king of the world.

  3. Warren, Considering that getting an amendment through Congress requires a 2/3 vote in each House, do you really think the votes are there to pass such a mindless piece of crap?

    1. Also requires 2/3rds of the states. Imagine the tax increases and spending cuts required to balance the federal budget! Balanced on paper, that is. Reality would be much much messier. Even if there were enough idiots on Capitol Hill to vote for it, there’s no way it gets 38 state legislatures. Ironically it would get the most support in those states that get the most per capita in federal transfer payments.

      However there are enough state legislatures that’d realize that the $500 billion in current federal revenue sharing (for Medicaid and highways mostly) would disappear, so it would lead to state tax hikes too.

      1. Well, on the bright side, even with a balanced budget amendment, the government can spend as it wishes. Seigniorage revenue is booked as miscellaneous receipts, so when Tsy receives Fed’s net profits, it reduces the budget deficit.

        Remember, the Fed buys coins from Tsy at face value. Congress could continue to pass budgets that exceed tax receipts and Treasury would then fill in the gap by minting high denomination coins to deposit with the Fed (through Tsy T&L accounts, presumably). In lieu of draining reserves by selling Treasuries, the Fed could peg the FFR by simply paying IOR on the excess reserves (or let the FFR drop, after all, the natural rate of interest is zero). The primary dealers won’t like that at all, but they’re smart enough to realize they need to pull out the stops to lobby against the balanced budget amendment in the first place.

        In the meantime, Congress can at any time add to NFA without spending, err, a penny. The penny is less than worthless (each one costs 2 cents to make), Congress could exercise its coinage power to re-denominate it with a face value of, say, $5. Call it a reverse helicopter drop.

      2. The US would be in worse shape than CA is now with a balanced budget. And if you think the political divisiveness is bad now…..

        A balanced budget amendment would make the US even more of a banana republic.

      3. No way the US is going to have a balanced budget amendment while the financial sector is controlling Congress unless the government is allowed to borrow (issue bonds) off budget. Balanced budget = no bonds = no bond market.

    2. Since there’s no understanding of economics at any level, and even advocates of stimulus like Krugman are “deficit doves” who worry about “long term deficits”, I can imagine both congressmen and state legislatures being too scared to vote against it in the face of tea party goons screaming at them at town meetings. After all, everyone in the mainstream thinks that balanced budgets are the ideal, and that the only thing preventing them is “irresponsibility” (irresponsible spending on the Repub side, irresponsible lack-of-taxation on the Dem side). Try to explain he the deficits are endogenous and necessary and all you get are quizzical expressions…

      If it did pass, and they made a serious effort to enforce it, you could go from a bad recession to a unprecedented depression that would probably end in revolution.

      1. If it did pass, and they made a serious effort to enforce it, you could go from a bad recession to a unprecedented depression that would probably end in revolution.

        And people would be saying that the reason was that there wasn’t enough of a budget surplus. 🙁

      2. I agree, many or most of We the People want a balanced federal budget, which I suspect is based on relevant experience and understanding, with little or no thought given to monetary dynamics.

        Here’s an analogy (admittedly a crudely monetarist one) I’ve come up with that tries to illuminate those dynamics, and seems to get people’s attention (not sure it’s changed many minds). Please feel free to borrow, steal, riff on, improve it, whatever:

        “When the US was on a gold standard, gold mines needed to supply enough new gold to satisfy the economy’s demand for money. Essentially, gold mines had to run ongoing ‘deficits’ of gold in order to avoid deflation, recession, and depression.

        Since 1971-73, federal budget deficits have replaced gold mines as the source of new money [can insert observation here that every dollar collected in taxes or used to consume, trade, save, invest, gift, etc has its origin in federal spending].

        Under the gold standard, no sane person ever argued that gold mines should have re-buried the same amount of gold as they produced. And during recessions and depressions, almost everyone agreed that increased mine output (mines running even larger gold ‘deficits’) was a good thing.

        Today, arguing for a balanced federal budget is just as absurd as the argument for gold mines re-burying every ounce of gold they produced. Again, no one in their right minds ever made this argument then. So why do so many otherwise intelligent people now make it regarding federal deficits?”

    1. Too bad they discontinued the last series; it’s interesting to see the dip in State, Local and Private debt just before the rise which is just before the recession. Could we have a little money pump to the upper classes going on there? It might be interesting to plot it against the Republican birth rate…

      But that’s just me.

  4. Warren,
    I had some time to look into the data in the G.19 report which is I think where the AP got the data.

    If you look a the second table, non-adjusted, the non-revolving portion has drops in all credit originators except the “Federal Government”. This FG sector has a MoM increase of $27B, netted out with the other credit provider drops, you get the increase in non-revolving of the $10.4B referenced in the article.

    This may be the banks stuffing things into the SBA channel to reduce total risk? There is some anecdotal evidence here in the DC area that banks are doing things via originate/distribute to the SBA that they would have done themselves before. Hard to tell without more detail, but it doesnt look like it is vanilla auto loans and mortgages.


    1. Yeah, I had also noticed that lending by ‘Federal Government’ was the sole reason for non-revolving credit increasing. I’m slightly confused by the footnotes as to whether this is education funding (Sallie Mae) or something else.

      To the extent that it is a sustainable open-ended mechanism enabling real consumer credit expansion, Warren’s point may hold. But if it’s some kind of special program that won’t continue, then credit expansion seems further off.

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