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.

[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.

[Happy Monkey]

The thing that causes economics not to be a zero-sum game is the creation of wealth. Moneylending is not a segment of the economy that creates wealth (though if loaned to the right person who starts a successful business it may do it indirectory). If loaned to someone who can't afford to do anything but maintain the debt, it is a zero-sum game. Bankruptcies actually destroy wealth.