When The Bad News Is Good, And The Good News Is Bad

We are painfully aware in 2013 that any "growth" we might see in the American economy is dependent on ever greater amounts of debt. The reason is simple, and not often discussed—since 1980, incomes for the large majority of Americans have remained flat when adjusted for inflation. Almost all of the income gains over that period went to the wealthiest Americans, a trend which has only intensified since the financial meltdown. I will discuss that subject tomorrow in the context of "potential" output (GDP). This is a prequel to that post.

Before I get going here, I want to emphasize that the elites who run this country, and their Keynesian mouthpieces, are unwilling or unable to acknowledge the true situation with debt and income. This failure seems to result from some potent combination of self-interest (e.g. Jaime Dimon, Peter Orszag) and self-delusion (e.g. Paul Krugman, Mark Zandi).

The Federal Reserve recently issued its Consumer Credit (G.19) report for the 4th quarter of 2012. And what a depressing document it is. In a remarkable story called U.S. consumer borrowing up in December behind auto, student loans; but credit card use falls, the ever-reliable Associated Press service summed up the situation—

WASHINGTON — Americans stepped up borrowing in December to buy cars and attend school. But they cut back sharply on credit card use, continuing a trend that could hold back growth this year.

Read that again, because you will never find a more succinct statement describing the current economic situation in the United States. Economic "growth" may be held back this year because Americans are not borrowing enough money.

Consumer borrowing rose $14.6 billion in December from November to a total of $2.78 trillion, the Federal Reserve said Thursday. That’s the highest level on record.

The increase was driven entirely by gains in student and auto loans. Borrowing in the category that measures those loans increased $18.2 billion to $1.93 trillion. That’s the biggest monthly gain since November 2001.

The highest level on record. Read it and weep.

This chart courtesy of December Consumer Credit Growth Continues. Total Consumer Credit Outstanding – total consumer credit (blue line) vs total consumer credit without student loans (red line)

At least when you borrow money to buy a car, you get a car out of the deal. Borrowing money to finance a college education, especially if you borrow a lot, is just a roll of the dice. Your lifetime earnings may justify that "investment" but just as easily may not.

I note in passing the pernicious idea that getting an education is thought of as merely an investment, i.e. a financial transaction. Nobody running this corrupt country seems to think that being educated in and of itself is a good idea, excepting for themselves of course. Our rulers promote this view for obvious reasons. Education for the masses is an idea that didn't "stick" in the United States. Before World War II and the G.I. Bill, a college education was the sole province of the monied elites. Now the hoi polloi can go to ever more expensive trade schools called state universities and the like, and they get to pay an exorbitant price for this "investment" of their time and energy. What a deal!

The bad news in the Fed's report according the Associated Press was that "revolving credit" (credit cards, payday loans, etc.) fell off in the 4th quarter.

Credit card debt, however, fell $3.6 billion to total roughly $850 billion. Total credit card debt has declined 17 percent since July 2008.

Americans have been relying less on their credit cards since the Great Recession. And December’s decline could also be a signal that consumers were worried about higher Social Security taxes that began lowering take-home pay this year.

From Tim Iacono's Consumer Credit Surges, Credit Card Balances Decline

If you've got your head screwed on straight, you know just as well as I do that the "good news" here—the expansion of non-revolving student and auto loans—was actually bad news, and the "bad news"—the contraction of credit card debt—was actually good news.

Lucky us, to live in a society where common sense and morally right behavior have been stood on their heads.

Comments

[Oliver]

This upside-down morality is truly symbolic of a civilization in its death throes. Death is the operative word. Leaving aside the death of truth in economics, there are imperial state-appointed death squads roving the ex-Land of the Free and the entire globe, whether it's the non-judicial deliberate burning to death of an ex-policeman suspect in California or the indiscriminate remote-control drone strikes slaughtering children and women alongside one or two suspected jihadists. Due process is dead. The American Dream is dead. Freedom of assembly is dying, if not already dead. Food safety is dead. Independent mass media are dead. State respect for basic human rights is dead. An impartial Supreme Court is dead and gone. Just as bad, critical thinking is dead and buried under a mound of dum-dum popular "culture" and brain-numbing fast food and turn-a-blind-eye street corner narcotics - except for a handful of educated independent minds hanging on at the edges of the whirligig.

Depressed? Not me. We The People created the planters who planted these seeds and nurtured them, and now we are all reaping the harvest. So three cheers for our success in getting the job done. Mission accomplished.

[Clyde]

Or you could become highly qualified in geology and end up stacking shelves for no wage for a corporation -

http://www.bbc.co.uk/news/uk-politics-21490542

Iain Duncan-Smith: Puppet slave-master or tory government minister? You decide.

[Bill McDonald]

Part of the banking elite should be ecstatic as they can pop the cars when the loans go bad, and the "students" can not bankrupt on the debt- and the co-signors can lose their social security and military retirement income to garnishment, at least in part.

I didn't mention that with compound interest the size of the loan amount will be astronomical by the time the "student's" retirement income will be seized, as I don't want to be accused of "piling on."

[Makati1]

Assuming that the US economy survives a few more years, the number of guns in the hands of it's citizens will double. Then the police, National Guard, and military members will have to decide weither they fire on their neighbors, stay home and protect their families, or turn against the government. Any of the three will mean chaos and a quick plunge to 3rd world levels. Any bets?

[Andy]

Wrong, there is no good news here. The entire Fiat Ponzi is based on ever increasing debt. Like any good ponzi the wheels come off once you exits outnumber entrants. A debt based economy needs ever increasing amounts of debts to pay the unpayable interest. QED increased debts = bad, reduced debts = bad.

Kind of a Lose, Lose situation really. Hardwired into the very fabric of the way we chose to organise ourselves.

I read your blog every day, rarely comment, but I do appreciate the effort you put in.

regards

[Alexander Ač]

And furhter on: "greed is good", "war is peace", "climate change is good", "obesity is healthy", "people are rational", etc. ...any others?

cheers,

Alex

[Clyde]

Alex, how about Freedom is Slavery, Love is Hate?

"To know and not to know, to be conscious of complete truthfulness while telling carefully constructed lies, to hold simultaneously two opinions which cancelled out, knowing them to be contradictory and believing in both of them, to use logic against logic, to repudiate morality while laying claim to it, to believe that democracy was impossible and that the Party was the guardian of democracy, to forget, whatever it was necessary to forget, then to draw it back into memory again at the moment when it was needed, and then promptly to forget it again, and above all, to apply the same process to the process itself" G. Orwell.

[Oliver]

Alex and Clyde - Do you think that when 1984 was published in 1949, that was the cue to shut down operations on planet earth? As we know, genius George died soon after aged just 46, and since then no one in power anywhere has taken any notice of the message - and just about everything in the book has come to pass in terms of systemic degeneration.

[Clyde]

Oliver, the thing is that in the world Orwell created/envisioned there was no single cue for anyone to notice. It just sort of crept up on everyone and no-one even noticed. Just as it always was.

There have been so many cues to stop in our real world that we couldn't possibly have missed them all, but we sure have.
Maybe the dawn of agriculture was the first but who knows?

[John D]

In my neck of the woods, Payday Loan and Car Title Loan offices are popping up like dandelions. The leeches are still trying to squeeze blood out of turnips.

[Petros]

Actually it's very good news if you're an elit, since your life has just become so much easier. No need for subtle propaganda to get the masses where you want them to. The price mechanism will do the job for you just by itself; being in debt out of need (i.e. having little discretionary income) makes you that more responsive to price cues, whereas savings act as a buffer against price changes making you less responsive (for as long as your savings can afford it that is).

Thus if you want subjects that are "obedient" to the market's commands -a well lubricated economy- you better keep their attention captured. Those that listen will act in an economically rational way - those that don't will simply fall victims to progress for being irrational and choosing to ignore the market.

Natural selection in the economic life in fast forward mode; the fittest here being the most economically rational. That's how democracy becomes obsolete, just a meaningless tradition, or in biological terms a vestige that serves no useful function to society anymore - the equivalent of the human appendix.