Shop 'Til You Drop

With the Holiday Season upon us, Americans should take the time to reflect on where we've been and where we stand. This country is in deep, deep doo-doo, but Denial rules the airways. Most Americans say they believe in God. If that's true, now would be a good time to consult a Higher Power and pray for deliverance from people like Jacqueline Doherty at Barrons Magazine—

Off To The Mall

AFTER TWO PAINFUL YEARS of retrenchment, American consumers are flexing their wallets again. They have paid down debt, boosted their savings and otherwise strengthened their personal balance sheets since the recession hit with terrifying force in the second half of 2008.

As a result of their improving circumstances, the nation's merchants are likely to enjoy a jolly holiday season, with retail sales up 3.5% to 4%, exceeding both last year's meager 0.4% gain and expectations of 2.3% growth forecast by the National Retail Federation. More important, the consumer-dependent U.S. economy could grow by as much as 4% in 2011, well ahead of the current consensus estimate of a 2.4% increase in next year's gross domestic product. Consumer spending accounts for more than 70% of GDP, although that figure includes government spending on health care.

Look almost anywhere these days, and the data paint a picture of household finances on the mend. After three years of deleveraging, total U.S. consumer debt has fallen by roughly $1 trillion, to $11.58 trillion, from a peak of $12.5 trillion in the third quarter of 2008, according to data from the Federal Reserve Bank of New York. In particular, credit-card debt has shrunk by 16%, to around $730 billion, and auto loans have fallen about 12%, to $710 billion.

Moreover, household financial obligations—defined as debt and lease payments, rent, home insurance and property taxes—have fallen to 17% of disposable income, down from an all-time high of 18.9% in the third quarter of 2007 and below the 30-year average of 17.2%, notes James Paulsen, chief investment strategist at Wells Capital Management...

Poor Jacqueline. She has cited the Federal Reserve debt data, but seems to have no idea what it actually means. See my recent article Descending The Debt Mountain (graph below). Household debt stood at $4.6 trillion in 1999, and subsequently reached $12.5 trillion in 2008. Americans have shed $900 billion in debt, which means they have gotten rid of only 11.4% of the debt they piled up between 1999 and 2008. And now Jacqueline—may I call you Jackie?—has decided that American "consumers" are now ready to shop 'til they drop. Jesus wept. But wait, there's more. If she had looked at the Household Debt Mountain, Jackie would have seen that 74% of it is mortgage debt. No doubt she simply overlooked the fact that most observers see average national house prices declining from anywhere between 5 and 12% in the next couple years. And what does that mean? If you've got a mortgage, it means less equity and relatively more debt on the household balance sheet.

I was unaware of the "household financial obligations" data until Jackie cited it, and I'm glad these payments are down to "only" 17% of disposable income, but I wonder if she knows that 77% of households live paycheck-to-paycheck. Well, OK, I concede the point—those poor losers who Barrons just wishes would go off and die or otherwise disappear won't be hitting the Mall Of America (left) anytime soon, but that still leaves 23% of households with money or credit to burn.

Doherty quotes James Paulsen, a starry-eyed optimist who calls the current "recovery" the strongest of the last 25 years. I assume Paulsen was the most deluded upbeat source Barrons could find. His data on household financial obligations conflicts with results I published in The Worst Is Yet To Come In Housing. He's the one who told Barrons we may get 4% GDP growth next year. Perhaps Paulsen is unaware that U5 unemployment is over 11% and there's a Big Elephant in the room called the "Housing Market"—

Paulsen expects household debt to "bottom out and start turning up next year," as the recovery blossoms. Noting that fears of a double-dip recession have faded and leading indicators have risen, he expects the economy to grow by 3.5% to 4% next year.

Having reduced our collective household debt from $12.5 trillion to $11.58 trillion (11,580,000,000,000), Barrons' Brilliant Idea is that we Americans have retrenched for a few years, and now it's time to screw this austerity nonsense. The time is ripe for Americans to go off to the mall and create more debt. Run up the credit cards, buy a new car, and don't be afraid of those student loans—perhaps they really aren't the Gateway To Debt Slavery. If you're really feeling frisky, buy a house that may decline in value over the next few years.

If we Americans work hard enough, and I know we can—that old American Can-Do Spirit is back!—we can get that debt pile right back to where it stood in 2008. But this won't come for free. You've got to get in your car, you've got to buy some gas if you're low, you've got to drive to the mall, you've got to remember to bring the plastic with you, you've got to park your car—if you can find a spot!— you've got to walk from the car to the entrance, you've got to stroll around aimlessly with a dazed look in your eye, you've got to stop in various shops and boutiques to look over the merchandise and finally—this is the most important part—you've got to whip out that plastic and buy some stuff you don't need.

Then, and only then, will we Americans ascend to the debt mountain top, where once again we will reign supreme as the Stupidest People on Earth. Only then will Un-American foreigners look upon us with wonder, their eyes fixed upon our debt pile, and say—

Those people aren't too smart, are they? Somebody has got to pay for all this, and those bankrupt, war-crazed fools have got all the weapons! What are we going to do now?

Happily, that's not our problem—it's their problem. We're Americans! So shop 'til you drop.

 

Comments

[Remi]

I wouldn't put it beyond the average consumer to pile on more debt for the sake of the holiday spirit. It's not just American's that are at issue: compare the debt problems with global GHG emissions. In 2009, the recession helped us reduce emissions where voluntary measures failed. Instead of either continuing the necessary downward trend, or even keeping things steady, we have bounced back such that we will make up for the reductions of last year (from ClimateProgress.org):

"Scientists have revised their figures on global CO2 emissions, showing that levels fell by just 1.3 per cent in 2009 – less than half of what was expected. This year they are likely to increase by more than 3 per cent, greater than the average annual increase for the last decade."