Still Addicted To Credit.

Will Bancroft finds some concerns in US consumer debt levels and asks what it means. We have looked before at the need for consumers and governments to endure a healthy process of cutting debt, but some lagging indicators recently out of America might be unhealthy.

As 2011 drew to a close there had been chatter that the Western world’s consumers had begun an all too necessary delivering process and cutting their personal debt levels. The US consumer being a little more dynamic that his European equivalent was leading this charge, with estimates that consumer deleveraging of between 16-20% had occurred to peak indebtedness of 2007.

Against this, US retail sales were poor in the final quarter of 2011. Perhaps the market was moving to rebalance towards equilibrium and the consumer was returning to sustainability?

Apparently not; although retail sales were relatively weak, the US consumer is still so hard pressed that mere existence and some indulgence cannot be funded out of cash in his pocket.

Leaning on credit again

In fact Non-Seasonally Adjusted Credit in December 2011 rose month on month by $33 billion. As ZeroHedge reported, this was the third highest in the last 18 years.

The debt taken on by the American consumer was largely Non-Revolving Credit (eg – car or healthcare loans), sometimes considered the lesser of two evils when compared to Revolving Credit Facilities (eg – credit cards).

Perhaps the festive season is an anomaly when viewed against the rest of the year and a healthier trend? Perhaps the pressure to provide wives, husbands, and children’s with that special gift is irresistible, and more difficult to block out than other temptations or pressures throughout the rest of the year?

We cannot be sure, but it’s fair to say the US consumer had to live significantly beyond his means to have a happy Christmas. However, if this micro-trend exhibited itself across the rest of the Western world then the Western consumer still hasn’t managed to understand their relative standing and true standard of living in the new world order.

Same drug; different source

John Lohman’s interesting charts on US consumer debt levels, as published by ZeroHedge, also fail to prompt enthusiasm.  It seems that as the US consumer has been healthily deleveraging since mid-2009, the state’s ownership levels of consumer credit has been rising in a fashion that looks closely uncorrelated.

The debt drug is still finding its way into the economy but just from a different source. Instead of the US consumer tapping his credit, the US government has been finding the credit drug from another source. However, as we know the US government gets its credit drug from a bigger and badder dealer; the bond market.

Is the trend reflected?

It is too early to know how fully this behaviour might be reflected around the developed world, but hopefully it is just a short-term phenomenon in an otherwise uneven but healthy move to lower our personal dependence on debt.

As students of the Austrian school of economics we hope for a return to sounder growth based on real economic development and enterprise, less dependent on debt. Economic growth is like happiness; if you can achieve it naturally without dependence on any substance or stimulus it’s better.

Part of the problem is that central bankers are manipulating interest rates to rock bottom levels and distorting key market signals between lenders and borrowers. Markets are thus being prevented from their natural process of ebb and flow, from excess to the opposite, etc. We have looked at this before, and it does not help us. It’s one part of the ‘Bernanke put’ which puts a potential floor under the equity markets and the gold price. Let’s see what the rest of 2012 has in store for the consumers of the Western world.