Household Debt Rises, Does Anyone Care?

The Federal Reserve's Z.1 Flow Funds report came out on September 20, 2012. For the first time since the first quarter of 2008, household debt rose. Robert Oak at Economic Populist shows us the data.

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.

Data from the 2011 Census report. The household median income is 8.1% lower than it was in 2007 and 8.9% lower than it was in 1999.

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

 

Comments

[Ken Barrows]

Household debt is a disaster. If we look at total debt/GDP, the economy "failed" decades ago. We cannot maintain our lifestyles for even the short run with less debt. So, more private debt, then more public debt, then more private debt, repeat ad nauseum.

[Screech]

People do not like to revisit big decisions. Doing so threatens the ego and, by extension, ones position in the scheme of things.

If Dad bought Chevy trucks then I will too. If my friends like the Yankees then I will too. If high school was good enough for Pete then it's good enough for me. If mom went to work after having kids then I will too. And so it goes.

This problem is at the heart of all that ails us now. (And all that ever has ailed us.) It is why chaos will result from personal and societal inertia. It is why no decision can work even if that decision is perfect for all of humanity and the Earth.

"A scientific truth does not triumph by convincing its opponents and making them see the light, but rather because its opponents eventually die and a new generation grows up that is familiar with it."
Max Planck

Sad, isn't it?

[Bill]

I'd bet the increase is due to $4 gasoline riding on the VISA card...

[JohnWDB]

Yes, Bill, and $5 milk, and $3 bread, and the entire basket of goods whose prices are tied to petroleum. With 23% interest, the $4 gas becomes $6-$8 gas, when and if it is ever paid for. Debt that doesn't either translate into greater future income (*some* student loans) or substitute for otherwise necessary expenditures (mortgages in lieu of rent) is a good way to ensure chronic poverty. Krugman has bought into the lie that bubble economies represent real economic growth. Unfortunately, they are a facade, designed to wring a few more years out of a failing system. Collectively spending more than you make might puff up a phony economy, but the day of reckoning always comes eventually. That day is today. Krugman's solution is to either publicize private debt or depreciate private wealth (printing money). In his mind, the solution is obvious and if not for a few meddling kids in the Republican party, these genius solutions would already be implemented.

[Don Levit]

Personally, I think the private debt explosion is merely an extension of the public debt explosion.

People like Krugman seem to think that debt is good. There are many people I have corresponded with on other blogs who believe that government debt is equal to cash.

Bruce Webb over at the Angry Bear blog believes the Treasuries in the SS trust fund are better than cash, for the Treasuries pay interest. He fails to mention that redeeming the Treasuries' interest since 2008 (and eventually the principal) requires new general revenues, as it does for all pay-as-you-go government expenses, like Medicaid.
Even the interest on the SS bonds is paid with more debt (not cash).

People like Bruce are very intelligent, but when it comes to the SS trust fund, it seems his heart has completely outsourced his brain.

This is in spite of many excerpts and links I have provided from the Treasury, the GAO, the CBO, and even the Social Security Administration itself!

The mantra in the 1980s was "Greed is Good."

Now, the mantra is "Debt is Good."

Don Levit

[Ken Barrows]

Maybe debt is so good that the USA should collect all government revenue through debt and forget about taxes.

[Ben]

I wonder how much debt household debt will "jump" after the inhumane bastards in our government cut social security. It makes me fucking sick just thinking about it.

[Taylor @ UK Payday Loan]

The debt households will surely raise more than we think, then they’ll just stay quiet.