Economic Unsustainability & Credit Deception

[unlawflcombatnt]

Once again the Federal Reserve has altered previously posted statistics in a less favorable direction. This time they've revised previously posted statistics for Consumer Credit. This increases the total outstanding consumer credit $158 billion, as of June 2006. The initially posted June 2006 consumer credit was revised upward from $2.1759 trillion to $2.3443 trillion. July added another $5.6 billion (or $0.0056 trillion) to the total outstanding credit. If July's increase is added in, it makes the new numbers for total outstanding consumer credit $164 billion higher than June's posted statistics. To put this in perspective, this is about 1.26% of our current, nominal (non-inflation-adjusted) GDP of $13 trillion. Thus from 2000, 1.26% more of our GDP was financed by consumer credit than was originally stated. This makes our current "savings" rate (Disposable Personal Income - Personal Outlays) even more negative than previously stated. These revisions can be seen in the modified copies of the charts from the Federal Reserve shown below.

The top half of the chart shows the most current numbers from September 8, 2006. The bottom half shows the previously posted numbers (prior to the upward revision) published on August 7, 2006. The comparative changes in "total" credit are underlined in red.



The top half of the above table can be found at the Federal Reserve G19. (The bottom half is from the August release is not available, as it has been upwardly revised.)

For 2005 alone, this upward revision gives an annual increase in consumer credit of $88 billion (from the previously stated $56 billion.) Thus, $32 billion more in consumer spending was financed by borrowing than was previously stated. (This "credit" spending does not include consumption spending financed by borrowed money from home equity extraction. Home equity extraction was estimated at between $600-800 billion in 2005. Of this, at least $150-250 billion went toward consumer spending in 2005.) A copy of Table 1B from the BEA's 2nd quarter GDP report (from July) can be seen below.



This above table can also be found at Bureau of Economic Analysis on page 12, Table 1B.

From this earlier report by the BEA from July, the reported annual personal "savings" for 2005 was -$34.8 billion. Without any additional changes (i.e., assuming GDP and consumer spending are not revised, and there are no other offsetting adjustments made) the 2005 savings would change to a -$66.8 billion. In other words, Americans spent $66.8 billion more than their Disposable Personal Income in 2005.

To give an idea of how large this is, the growth in 2005 non-inflation-adjusted GDP was approximately $744 billion. For 2005, Personal Outlays increased $563 billion in non-inflation-adjusted dollars, while Disposable Personal Income (DPI) increased only $354 billion. (In comparison, the 2004 increase was in DPI was $519 billion.) Thus, the increase in 2005 Personal Outlays was $209 billion greater than the increase in Disposable Personal Income. This is a major reversal in pattern. Not since the Great Depression in 1933 have Personal Outlays exceeded Disposable Personal Income.

Normally consumer spending has been 2/3 of total GDP. Meanwhile, Disposable Personal Income increases have been greater than 2/3 of the increase in GDP. The excess of Disposable Personal Income over Personal Outlays is the "savings" rate. Under the Bush administration, however, the excess of income over outlays has been declining. In 2004, the increase in DPI was the same as the increase in Personal Outlays, meaning there was 0 net increase in savings in 2004. This trend has continued and now the "excess" has turned negative. In 2005 consumer spending increased more than personal income. Now the increase in DPI is less than 2/3 of our GDP. In fact, the increase in 2005 was only 48% as large as our our GDP increase. To make things worse, consumer spending has actually increased to 70% of our GDP. Now there is a huge gap between consumer income and consumer spending. That gap has been filled with borrowed money from both credit cards and home equity extraction.

In 2005, the nominal GDP growth rate of 6.35% declines to 3.15% when adjusted for inflation (using the BEA's GDP deflater.) Meanwhile, the nominal increase in DPI of 4.08% declines to 0.88% when adjusted for inflation. Maintaining a GDP growth rate greater than the increase in Disposable Personal Income is completely unsustainable, especially when the gap is this large. Growth in real GDP usually reverts to a level that is less than Disposable Personal Income growth. In this case, that growth rate would be below 0.88% annually.

Again, increasing GDP through deficit-financed consumer spending is not sustainable in the long-run. We will soon find out when this short-term phenomenon hits a dead-end created by its long-term unsustainablility.

unlawflcombatnt

[tw]

Originally Posted by unlawflcombatnt

Once again the Federal Reserve has altered previously posted statistics in a less favorable direction.

Guns or butter. Back in Vietnam, we tried to have guns AND butter. But then economic forces take revenge many years later. If spending $100 billion annual in Iraq, then where does that money come from?

[Undertoad]

Once again the "Things are secretly bad" school of economics. People are spending their money! Oh crap, what are we gonna do now? This can't go on forever!

[headsplice]

I think the point is: People are spending more money than they can safely spend, long-term-wise. Do you live off of credit cards Ut?

[Undertoad]

No, mostly home equity at this point. You wouldn't want to use me as an example in this case; I'm still in the "safely" zone but not much longer.

[Tonchi]

I have been told that practically the entire "economic upturn" which the Bushies like to tout is SOLELY the result of the refinancing of practically every home in the US. After the Fed maintained the obscenely low interest rates for several years, we all were sucked in. In my case, I refinanced only so much as to get back the money I gave them as a down-payment before my house tripled in value (on paper) since I bought it 4 years ago. But the overwhelming majority of Americans have gone on a drunken-sailor kind of spending spree or bought considerably larger houses with considerably larger debt. The idiots "seized the opportunity"

Since before I went on total disability I worked in Real Estate and as a loan processor, I saw the most improbable people acquiring financing that nobody in their right mind should have granted them. An incredible amount of new housing was created, much of it fueled by speculators and "flipping" which caused prices to soar out of the reach of most buyers in the end. Some estimates are that fully 30% of these units with artificially inflated prices (and payments) will end up back in the hands of the banks now that the ride is over. The ones who pulled out huge chunks of cash have spent it on luxury vacations, new cars, second homes, paying off credit cards which they continue to over-use, and just plain indulgence. Very few saved or invested any of this "found money". Well, the money is going to be gone and the new purchases will become anchors around their necks. Yep, they created a "booming economy", and now comes the crash.

[Clodfobble]

This may be a stupid question, I'm not really sure... But as long as I'm spending my money wisely, and not going into ridiculous amounts of debt or living beyond my means, why do I give a crap if a large portion of the country isn't behaving responsibly? Doesn't that just mean I'll get a good deal buying their house from them when they get foreclosed on? If a bunch of stupid people go bankrupt, how could this measurably affect me?

[glatt]

If someone gets into a deep hole financially, will they be buying your video games with cool sound effects, or trying to scape up enough to pay their mortgage? If it happens to enough people, there's your answer.

[Clodfobble]

Okay... but if they were being responsible in the first place, wouldn't that mean realizing they couldn't afford some things (like videogames*) to begin with, not buying them, and thus putting the businesses (me) in the same situation anyway? I suppose that with interest included, they will ultimately be able to buy less overall, so I'd be hurt in the long run that way. But if some people are going broke paying debts/interest, someone else is receiving that money from them, and won't they buy more things instead? I mean, it would suck on a personal level, but if my industry went under couldn't I in theory go get a job with a credit card company, since they'd be doing so well?


*Studies actually show that in recessive economies people buy more entertainment luxuries (specifically videogames, but others too) as a means of escapism. But I get your point.

[tw]

Originally Posted by Clodfobble

Okay... but if they were being responsible in the first place, wouldn't that mean realizing they couldn't afford some things (like videogames*) to begin with, not buying them, and thus putting the businesses (me) in the same situation anyway?

Economics punishes everyone in tomorrow's economy for 'sins of today'. Return to Vietnam when we were spending $1million every day and yet not even showing those expenditures in budgets. When cars only got 8 and 12 MPG and Americans were, for the first time in history, not just importing oil, but importing more than 50% of its oil.

So what happened? One could have been so fiscally responsible. But massive dollar piles were accumulating overseas - just like today. Eventually the world demanded things for those dollars. The world then buys America. Own the buildings, land, factories, overseas investements, ships, companies ... Suddenly America no longer owns so much. Those vast incomes once associated with ownership - such as the world's third largest industrial base - no longer exist.

Now we must cut salaries, reduce expenditures, buy less things, lower the American standards of living. Well, we did not do that at first. Therefore economics took even further revenge - including something only found in mismanaged S American countries - stagflation. Value of American savings and investments dropped by a factor of five - even though prices were increasing. One foolish president even instituted wage and price controls. No one was allowed to raise their prices. Of course that only made things even worse later. What could once be bought with a penny in 1970 required a nickel in 1980.

No matter how fiscally responsible one 1970 citizen, still, the drunken party that was Vietnam and massive energy consumption hurt everyone. Interest rates for homes went to 20%. Why would that be a problem to a fiscally responsible citizen? Because that money was being loaned by Japanese - who held vast sums of American dollars and now needed higher interest rates to cover their losses and justify investing in a less stable economy. Dollar dropped to 20% of its earlier value - even to a fiscally responsible citizen who saved. Imagine losing 80% of your investments and saving in only ten years. Welcome to the drunken party that started when presidents lied - and we believed them.

Then American jobs dried up. New home construction disappeared. Companies stopped investing in America in the late 1960s to pay for Vietnam, et al. Therefore by 1979, there was always at least one American car in every winter time parking lot that did not start. Gas lines. Everyone suffered. Europe became too expensive even for some of the rich as dollar value diminished. America, a nation so dependent on imports, had to mortgage more of America to pay for those imports. With a dropping dollar, those mortgage rates to buy things were now record high steep.

American exports were reduced mostly to agriculture, lumber, and other raw materials as other countries - including those who then own parts of the world's third largest industrial base - now profited by doing what Americans once owned.

It is easy to be fiscally irresponsible and not see these adverse affects. Those affects occur years or decade later. And then many forget why times got so tough. They blamed only what they see today. Jimmy Carter took much of that blame. People too brainwashed in business school 'short term' thoughts did not blame what was happening on ten years earlier (late 1960s and early 1970s) while two presidents lied even about an Iraq-like war. Everyone then suffers. Even crime soared. Drugs - any teenager that did not try drugs back then is lying. Don't trust anyone over 30 - because lying even from Nixon to justify a bad economy only got worse.

It is how economics works. Economics takes revenge years later for fiscal irresponsibility – especially when all that borrowed and spent money did not create innovative products four and ten years later.

Be cautious. The late 1960s looked so prosperous even as the economy was spiralling into what would eventually become stagflation. It is how economics work when you don't associate today's economic numbers only with fiscal responsibility five, ten, and twenty years earlier. Make a mistake; assume today's economy is from today's fiscal responsibility? Politicians and bean counters will lie to spend us into recession and stagflation again. But you will not see those failures for many years when the bills come due. Then everyone suffers. That is what economics is about. Everyone using the same currency is punished for fiscal irresponsibility of that currency.

[footfootfoot]

Take notes, we'll see what happens soon.

I wonder the same thing. I have a friend whose house was insanely over assessed by the bank and he is leveraged out to infinity and beyond. Living on maxed out cards and a line of credit against his house which, if he had to sell, he might break even. A few bad months and homeboy is gonna be living in the woods.

I haven't had a credit card in over ten years. Never missed it, never needed it. I'll do without.

[Elspode]

I think the main point is that *everyone* is living on credit, not hard cash. There's nothing underpinning a significant portion of our economy except for perceived value. It is a brick and mortar version of the same kind of thinking that drove the dotcom boom/bust.

[slang]

Originally Posted by Elspode

*everyone* is living on credit.

Most? Maybe, but not everyone.

[Elspode]

Damn you logical thinkers refuting my carefully thought-out, unsupportable blanket statements!

Wasn't that why we had the Great Depression, because everyone was buying stocks on margin (a form of credit), and when the stocks went down they were still stuck paying the original higher price that they had assured the stock broker they would pay, assuming the stock would go up, except too many stocks went down instead?

Its kind of like Footx3's friend with the over valued house that he living off the inflated proceeds of. If he loses his job, he's going to have to sell at the real price, not the imaginary one.

On the bright side, living in the woods is not that bad - at least until winter comes.