Securities backed by credit cards, auto loans, and even what mortgage brokers thought were good credit risks in the housing market are all facing trouble ahead. De-leveraging-the selling of assets bought with credit-is taking place at the corporate and household level, even if it’s not always willingly. Necessity is the mother of liquidation.
The New York Times reports that, “Bond investors first stopped buying private home mortgage deals, then shunned commercial mortgages. Now, they are becoming wary of credit card debts and auto loans. In the first half, private securitisations reached just $131 billion, down sharply from $1 trillion in the same period last year.” Investment banks can’t pawn off debt-backed assets as easily as they used to.
What does this tell us about the world we live in? People are cutting back on debt. And not just investors either. Inflation in food and energy has made it difficult at the margin for individuals to pay their debts on time. With income growth not matching rising prices, more people are falling behind on their bills and cutting back on their consumption.
If there’s any good news in all of it, it’s that there’s probably a lot of fat to cut in the average household budget. There are many things that are nice to have, but not essential, like espresso machines and Blue Ray players and a Dyson vacuum.
The trouble is that one man’s thrift is another man’s profit. A less consumptive/consuming lifestyle for households will inevitably lead to lower jobs and wages for someone. Which industries stand to lose the most if consumption retreats at the margins?
Barrista at Starbucks’ would be a good place to start. But if you work for a major car maker, investment banker, or luxury hand-bag maker, then you might want to dust off your CV and work on your interview skills. A lot of economic activity goes away when consumption is reduced, the more so when your economy is driven by spending.
By the way, though we don’t have the exact numbers handy, we suspect that consumption contributes less to GDP in Australia than it does in America. In America, consumer spending accounts for 72% of GDP. There’s a whole lotta spending going on in America.
In Australia, there’s a whole lotta spending and debt as well (or dis-saving, as the economists call it). But there’s also a whole lot of business investment and production. More on this tomorrow. For now, take a look at the two charts below from the ABS publication Australian System of National Accounts. We’ll tell you what we think they mean tomorrow. But if you want to venture a guess today, ping us at email@example.com
Markets and Money