Hair of the Dog That Bit Ya

May 8th, 2012 at 8:24 am

It’s commonly thought that the signal that the deleveraging cycle is behind us will be when household debt levels get back down to where they were before the recession.  I think that view is wrong, however, in that it discounts the “Minsky moment” when both borrowers and lenders generally flip from under-pricing to overpricing risk, from reckless risk-seeking to risk aversion, from gorging on debt to starving.

So I’m looking for credit indicators not just to be going down, but to be going down for a while and then reversing course.  That’s what you see in the most recent outstanding consumer credit reports as shown below (annual % changes), including both short-term, or revolving debt (like credit cards), and longer term debt, like student loans and cars (but nothing related to real estate).

No one’s looking for another debt bubble, and as I wrote about here, debt as a substitute for earnings has been a serious structural problem for some in the middle class.  But the fact that households are availing themselves of credit again is likely a good sign.


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6 comments in reply to "Hair of the Dog That Bit Ya"

  1. Fred Donaldson says:

    The growth in non-real estate consumer debt is caused in part by Americans switching from home credit lines (2nd mortgages) to credit cards and installment loans.

    As home prices drop, so do the available home equity loan amounts, forcing people out of borrowing tax free to borrowing with no tax deduction. This also adds to the real interest expense and forces higher borrowing amounts to equal the same net available loan.

  2. Fabius Maximus says:

    The YTD increase is almost entirely education loans by the Federal government. Ex-ed, they were down MoM and since 2007. That’s bad, as many estimates of eventual default are 50%+. Subprime 2.0.

    US Consumer credit since 2007 and YoY, as of Q1 2012 (non-seasonally adjusted):

    Type 2007 Q1-2011 Q1-2012
    Total $2,555.3 $2,401.9 $2,522.2
    Federal $ 98.4 $ 355.2 $ 460.2
    Non-Federal $2,456.9 $2,046.7 $2,062.0


    Type since-2007 YoY
    Total – 1.3% 5.0%
    Federal 367.7% 29.6%
    Non-Federal -16.1% 0.7%

    Loans by type are reported only non-seasonally adjusted.
    All Federal loans on the G19 are education loans.
    Not all education loans are from the Federal government.

    • Jared Bernstein says:

      Auto and student loans have been growing as well.

      • Fabius Maximus says:

        (1) The G19 does not break out loans by purpose, only by holder.

        (2) We know Federal education loans are rising, because those are the only type of Federal consumer loans. Given what we know, its a reasonable deduction that student loans (all sources) are rising fast. That’s probably not good, given the estimates of high default rates.

        (3) Auto loans are probably rising along with auto sales, but the G19 gives little info on the magnitude. But even so, other loans must be *decreasing*, since the total non-education is down almost 1/5 from 2007 and roughly flat YTD. IMO, that’s the key take-away from this data — more important than the aggregate return of consumer loans to (almost) their 2008 peak.

  3. Michael says:

    People need jobs.

  4. perplexed says:

    “But the fact that households are availing themselves of credit again is likely a good sign.”

    This time may indeed be different. With virtually all of the income gains going to the top and a significant portion (50%+-) of the debt reduction coming from foreclosures and bankruptcies, the income that supports this debt hasn’t changed much. Fabius Maximus makes a great point above about student loans (where’s the income that supports these?), but who’s watching the TBTF’s and who’s really taking on the additional risk?