Household debt jumped 1.25% and was the largest increase since 2008. Consumer credit increased 6.25%. These figures are annualized. Household debt has been declining since Q2 2008 and from Q1 2012 dropped another 2%.
This quarter means, oh yeah, we can all go into more debt once again. Believe this or not, increases in household debt are taken as a positive economic sign, except for those of us who have to make the payments.
Annualized rate of change. Total borrowing by U.S. households rose by $157.3 billion in the second quarter, only the second of the last 17 quarters to show an increase. Total U.S. household debt is just a shade under $13 trillion.
One quarter of rising debt does not a trend make, but any rise in household debt should be sending off alarm bells among policymakers at this juncture. Unfortunately, as Oak points out, increases in household debt are taken as a positive economic sign. That's patently absurd, but Neo-Keynesian economic theory doesn't care. Household debt rises when incomes do not meet expenses. This is not Rocket Science. So this is a good time to show the longer-term income chart, from Robert Oak's The Rich And The Rest Of Us.
Debt compensates for lost income, or unrealized income gains (chart above). To get some insight into the economic "thinking" behind income and debt, let us turn to Paul Krugman—who else?—to explain it. This text is from his August 2, 2012 column Debt, Depression, DeMarco.
Some background: many economists believe that the overhang of excess household debt, a legacy of the bubble years, is the biggest factor holding back economic recovery. Loosely speaking, excess debt has created a situation in which everyone is trying to spend less than their income. Since this is collectively impossible — my spending is your income, and your spending is my income — the result is a persistently depressed economy.
Needless to say, most American households are not spending less than their income. Americans can't make ends meet! Krugman wants Americans to spend all of their incomes, or more. I'll give you Tim Iacono's take on this absurdity.
Now, there is an argument to be made that debt needs to be written down in order for a more sustainable economic recovery to develop and, as a non-economist, I’m probably missing something here about spending and income as it relates to how economists think of these terms, but, to suggest that the fundamental problem in the U.S. economy today is that people are spending less than their income is just ludicrous.
The only way you spend all or more of your income is to take on debt, so, the natural response to having taken on too much debt in years past is to take some of your current income to pay down that debt and that’s what’s happening now – the bill has come due and we’re paying it.
Just when you thought that the conventional wisdom amongst some prominent economists that “aggregate demand is the only thing that matters” couldn’t get any more bizarre, it does.
I would go further than Tim. If you are forced to spend all of your income or more than your income to get by day-to-day, your only alternatives are to take on debt or cut expenses. If frugality has run its course, and anything you might cut now is for necessary expenditures (food, mortgage or rent payments, gas, electricity bills, etc.), your only choice is to take on more debt.
And that, I believe, is what the Fed's flow of funds report is showing us. Most of the "delevering" that has gone on was in mortgage debt, and most of that was due to foreclosures, short sales, walk-aways, etc. The data (chart above) shows that median household income has decreased since 2008. Also see my recent post The Sound Of One Hand Clapping.
Few people seemed to notice that household debt increased in the 2nd quarter of 2012. And it wasn't due to rising mortgage debt; that continued to decline. Which means what? More student debt, more car loans—consumer credit rose 6.25% at an annualized rate. Does anyone care?
I can tell you this much—Americans are not taking on more debt because they think Happy Days Are Here Again.
Rising consumer credit debt is a disaster. It's also disgusting. I find it more and more difficult to get over that disgust and report on the economy.
Bonus Video — Happy Days, Ben Selvin and His Orchestra, 1930