Consumer Debt Repayment: The Sign of a Lengthy Correction?

US stocks have been teetering on the top of a wall for weeks. Someone should give them a shove!

But yesterday, the Dow rose 103 points. Gold was up $2.

This leaves investors hoping, wondering, waiting for another day. “Maybe I can make some money in the stock market, after all,” say the mom & pop mutual fund buyers. “I gotta stay in this market; it’s going up,” say the pros.

And so it goes…

But the Great Correction continues. Here’s the latest from Bloomberg:

US Household Debt Shrank 1.5% in the Second Quarter

American households pared their debts last quarter, closing credit card accounts and taking out fewer mortgages as unemployment persisted near a 26-year high, a survey by the Federal Reserve Bank of New York showed.

Consumer indebtedness totaled $11.7 trillion at the end of June, a decline of 1.5 percent from the previous three months and down 6.5 percent from its peak in the third quarter of 2008, according to the New York Fed’s first quarterly report on household debt and credit.

The report reinforces forecasts for a slowing economy in the second half of 2010 as consumers hold back on spending and rebuild savings. The Fed last week said the recovery would be “more modest” than it had anticipated and announced it would keep its securities holdings at $2.05 trillion to prevent money from draining out of the financial system.

“Everybody understood coming into this recovery that the need for reduction in debt and deleveraging was going to be a pretty significant headwind,” said Stephen Stanley, chief economist at Pierpont Securities LLC in Stamford, Connecticut. “Households in particular continue to be much more conservative than in the recent past.”

The Fed last week said high unemployment, lower housing wealth and tight credit are restraining the household spending that makes up 70 percent of the world’s largest economy. Policy makers repeated a pledge to keep interest rates low for an “extended period” to keep the recovery going. The jobless rate stayed at 9.5 percent in July and has remained above 9 percent since May 2009.

Consumer debt increased dramatically in the Bubble Epoque. Paul Wright explains:

In 2005, America’s 164 million credit card holders charged $2 trillion to their credit cards – amounting to $12,500 per credit card holder. This contributed to massive consumer debt, which rose over seven times in 28 years – from $355 billion in 1980 to $2.6 trillion in 2008. By 2008, consumer debt increased seven times, while the savings rate was seven times lower than in 1980.

Now consumers are paying down their debt – or defaulting on it – at a rate of about 6% per year. We don’t know where this process will go, but if consumer debt is to be cut in half, it will take about 7-10 years, at this rate.

In the meantime, The New York Times calls America’s nationalized mortgage lenders, Fannie and Freddie, “zombies.” But it says they must be “tolerated for a while.”

The amount of mortgage payments in arrears is increasing.

And the Fed is back in the bond market buying federal government debt. It bought $2.55 billion worth of Treasury debt yesterday.

The moaning and whining…the bailouts and boondoggles…the crackpot solutions and ditzy diversions – everything is normal!

And more thoughts…

The weather in France has turned autumnal. It is drizzling this morning. We started a fire in the kitchen, just to make it a little cheerier.

“This has been a great summer,” Elizabeth sighed. “We’ve had four of the children with us…they’ve all had a good time. No one got too upset or too out-of-line. We didn’t have any trouble with the neighbors. And the weather was good – at least for a few days.”

A few of the neighbors came over last night for a barbecue. The wind was blowing. But it wasn’t too cool. So, Damien, the gardener/handyman, brought over some beef that he had slaughtered a couple of days ago and cooked it. Christine, a red-haired woman from across the road, brought a chocolate cake. Other guests brought wine – some from Bordeaux…some from Burgundy.

“August is practically a magical month for us,” said one of our French guests. “We look forward to it all year long. Because the weather is usually very nice. And it’s when almost everyone takes a vacation. We spent two weeks in Burgundy. It was delightful. Christine’s brother got married. So we combined the wedding trip with a vacation.

“Have you ever been to Burgundy? It’s not at all like around here. It’s a much richer area. I mean, the earth is richer…so the towns are richer…and there are more of them. You go a few kilometers, and there’s another prosperous little town, usually with an old chateau.

“Burgundy was the last area that was joined to France…by Louis 14th, I think. The people are very nice. I was surprised by how warmly we were greeted. You know, the French are not always very friendly to strangers. But Christine’s brother lives there so we were introduced to many people. And I found them exceptionally charming and friendly. Even total strangers were nice. We had a great time.”

“It would be so nice to be able to get out and explore France,” said Elizabeth later that night. “We haven’t really seen anything much, even though we’ve been here for more than 15 years. But that’s what you get when you buy a place. Well, it’s what you get when you buy a big, rundown place like this. You spend all your time – every vacation – fixing it up. And since you have a place of your own, it doesn’t make sense to go and rent a room in a hotel…or a little house somewhere.

“And, of course, then the children become attached to it and look forward to coming here.

“But what a nice summer it was. And now it’s almost over. The children are leaving. Edward leaves tomorrow. I’m driving him and [his cousin] Catherine to Poitiers to the train station. And then, Henry, Jules and Maria leave on Friday. It will be just us and your mother left here. I’m afraid it’s going to be very lonely and sad…I hope the sun comes out…”

“Don’t worry,” said her husband, sounding ironic, but completely in earnest, “we have each other.”

“Yes…” Elizabeth replied, the edges of her mouth turning down ever- so-slightly.


Bill Bonner
for Markets and Money

Bill Bonner

Bill Bonner

Since founding Agora Inc. in 1979, Bill Bonner has found success and garnered camaraderie in numerous communities and industries. A man of many talents, his entrepreneurial savvy, unique writings, philanthropic undertakings, and preservationist activities have all been recognized and awarded by some of America’s most respected authorities. Along with Addison Wiggin, his friend and colleague, Bill has written two New York Times best-selling books, Financial Reckoning Day and Empire of Debt. Both works have been critically acclaimed internationally. With political journalist Lila Rajiva, he wrote his third New York Times best-selling book, Mobs, Messiahs and Markets, which offers concrete advice on how to avoid the public spectacle of modern finance. Since 1999, Bill has been a daily contributor and the driving force behind Markets and Money.
Bill Bonner

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