U.S. Household Debt Is Totally Out Of Control

Dave Cohen / Decline of the Empire

It’s almost worth the Great Depression to learn how little our big men know
— Will Rogers

We have a stunning chart today which illustrates why taking on boatloads of student debt is not a good “investment” for most young people.

JFC! (See here if this acronym is new to you).

The New York Fed has updated the household debt numbers for Q3:2012. Read it and weep.

In its latest Quarterly Report on Household Debt and Credit, the Federal Reserve Bank of New York announced that in the third quarter, non-real estate household debt jumped 2.3 percent to $2.7 trillion. The increase was due to a boost in student loans ($42 billion), auto loans ($18 billion) and credit card balances ($2 billion).

The Quarterly Report on Household Debt and Credit is based on data from the New York Fed’s Consumer Credit Panel, a nationally representative random sample drawn from Equifax credit report data. During the third quarter of 2012, total consumer indebtedness shrank $74 billion to $11.31 trillion, a 0.7 percent decrease from the previous quarter. The reduction in overall debt is attributed to a decrease in mortgage debt ($120 billion) and home equity lines of credit ($16 billion), despite mortgage originations increasing for a fourth consecutive quarter.

“The increase in mortgage originations, auto loans and credit card balances suggests that consumers are slowly gaining confidence in their financial position,” said Donghoon Lee, senior economist at the New York Fed. “As consumers feel more comfortable, they may start to make purchases that were previously delayed.”

JFC! We might define an economist as a cheerleader who is incapable of learning anything. Donghoon Lee certainly fits the definition. If Lee had read my recent post Here We Go Again — Subprime Auto Loans!, he would have had an opportunity to learn that people who need a new car but can’t afford one are taking advantage of ultra-low interest rates and easy credit. “Consumer confidence” has nothing to do with it. And then there is the student debt situation.

Outstanding student loan debt now stands at $956 billion, an increase of $42 billion since last quarter. However, of the $42 billion, $23 billion is new debt while the remaining $19 billion is attributed to previously defaulted student loans that have been updated on credit reports this quarter.

As a result, the percent of student loan balances 90+ days delinquent increased to 11 percent this quarter.

From Charlotte Rampell’s Student Loan Debt Rising, and Often Not Being Paid Back — As consumer debt has been falling, so have consumers’ delinquency rates. As of Sept. 30, 8.9 percent of outstanding household debt was in some stage of delinquency, with 6.6 percent at least 90 days late. Bucking this trend is student loans. Student loan debt has been growing every quarter since at least 2003, the earliest data included in the report. And delinquency rates look worse than previously believed.

Despite her upbeat tone, Rampell fails to acknowledge that the 90+ days delinquency rate is also much higher than it was in 2007-2008 for auto loans and HELOCs, aka. HE revolving debt, and slightly higher for credit cards. The only “good” news is that mortgage debt delinquency in only slighly higher than it was before the housing market went belly-up. But of course that is due to people walking away from their mortgages, short sales, foreclosures, etc. In short, Americans have defaulted on or unloaded mortgage debt, which makes the delinquency rates look better. Otherwise, there is no Good News.

Speaking of HELOCs, check out Bloomberg’s Home Equity Loans Make Comeback Fueling U.S. Spending.

Home equity lines of credit that fueled a spending spree during the U.S. property boom are back.

U.S. property boom?

After six years of declines, lending for so-called HELOCs will rise 30 percent to $79.6 billion in 2012, the highest level since the start of the financial crisis in 2008, according to the economics research unit of Moody’s Corp. Originations next year will jump another 31 percent to $104 billion, it projected.

Lending tied to real estate is reviving as record-low mortgage rates spur the housing recovery while an improving job market makes it easier for people to borrow.

A rise in home equity lines is in turn helping the economy, fueling purchase of goods like televisions and refrigerators. Consumer spending, the biggest part of the economy, accelerated to a 2 percent annual rate last quarter from a 1.5 percent pace in the prior period.

JFC! People have to borrow against the equity in their house in order to buy televisions and refrigerators! And these Bloomberg propagandists think that’s Good News!

And now let’s look at the latest household debt mountain situation in toto.

From Bill McBride’s Fed: Consumer Deleveraging Continued in Q3, Student Debt increases.

This is deleveraging? No, sorry, that’s not what we’re looking at here. We’re looking at a travesty of a mockery of a sham. At this rate of “deleveraging” household debt will return to 2003 levels approximately never, especially in light of the fact that the Federal Reserve is doing everything they can to get people to buy houses they can’t afford, even at these “low” prices and mortgage interest rates. In fact, if it hadn’t been for “consumers” defaulting on their mortgages, household debt would be the same or higher than it was in 2008:Q3. JFC!

But ask a Keynesian economist, and he will tell you that debt doesn’t matter. He’s got a model of how the economy works, and that model doesn’t take debt levels into account. That economist will tell you that one man’s debt is another man’s income, so it’s a wash, everything works out in the end. If only 17 people have all the income, that’s OK with Paul Krugman, or Ben Bernanke, or Donghoon Lee, or Mark Zandi, or Brad Delong, or Dean Baker. You know, the stimulus folks. And why? Because their models say so! That’s why an increase in HELOCs which helps people to buy TVs made in China is thought to be Good News. That’s why the Keynesian economist never learns anything—he’s got a model! Jesus wept.

I never paid much attention to economic theories before 2007-2008, but I realized at that time that I would have to come up to speed in the Dismal Science. So I did, I learned some things about the way economists think, most of which were entirely contrary to common sense. And now look at the levels of household debt. It’s just like before the 2008 crash. Policymakers are trying to re-flate the same nonsense that got us here in the first place!

The most important take-away message I can give you is that the “thinking” of our “leaders” here in the United States, and the theory of “growth” they swear by, are utterly bankrupt in every sense of that word. They’ve got a defective hammer and everything looks like a nail to these clowns. That’s all they’ve got. In other words, they’ve got nothing.

Economic “growth” in the United States, as stated by the misleading, phony GDP number is a joke. And the joke’s on you. Economic growth can not be based on rising debt. It must be based on rising disposable incomes. But incomes for the large majority of Americans have been falling for a long time now. Hence the greater indebtedness.

Common sense!

Household debt in the United States is totally out of control. It’s disgusting.