Lead us not into deleveraging

Record drop in consumer credit - September 9, 2009

The drop was more than five times larger than economists forecast and marked the sixth straight month of declines -- the longest stretch since 1991.

July's $21.6 billion drop was a record, and on a percentage basis, the decline was the biggest since June 1975.

The global recession has reduced Americans' wealth by nearly 22% of since the middle of 2007.

US Stocks Climb As Investors Grow More Optimistic On Economy - Sep 9, 2009

"I'm getting a little more comfortable with this market from a fundamental standpoint," though it also remains prone to short-term swings based on chart-based trading, said portfolio manager Uri Landesman, of ING Investment Management in New York.

Consumer deleveraging datapoint of the day - September 8, 2009

Consumer credit decreased at an annual rate of 10-1/2 percent in July 2009. Revolving credit decreased at an annual rate of 8 percent, and nonrevolving credit decreased at an annual rate of 11-3/4 percent.

That’s huge, and it’s good news: individuals are clearly getting their fiscal houses in order.

And get this: consumers aren’t just deleveraging, they’re also getting more sensible about where they’re borrowing. Look at the numbers for credit unions: total consumer credit extended from credit unions has now hit a new all-time high of $238 billion. No deleveraging there

A fate worse than debt -- Sep 25th 2008

IT IS ugly, but deleveraging is the word of the moment. Financial institutions, desperate to repair the damage inflicted on their balance-sheets by mortgage-related securities, sell assets. In doing so, they exacerbate the problem. Forced sales push down the prices of assets, worsening the balance-sheets of other investors, forcing more asset sales, and so on. In the end, the government is the only entity left in the game with a balance-sheet strong enough to keep buying.

A cut in overall lending would be a complete reversal of trend. Morgan Stanley reckons that total American debt (ie, the gross debt of households, companies and the government) has risen inexorably since 1980 to more than 300% of GDP (see chart), higher than it was in the Depression. Consumers, in particular, were encouraged to borrow by low unemployment and interest rates and (until last year) rising asset prices. Their debt jumped from 71% of GDP in 2000 to 100% in 2007, a bigger increase in seven years than had occurred in the previous 20.

If consumers start to save more or borrow less, spending suffers. In the last three months, America has seen the weakest car sales since 1993, according to Bloomberg. A general decline in demand will cause businesses to shed jobs, creating further falls in demand and more bad debts.

Once started, the process is hard to stop. “What the financial and household sectors are doing is unwinding more than ten years of a credit boom,” says George Magnus, an economist at UBS. “The idea that they can rid themselves of this problem in a matter of months is pie in the sky.”

The Great Deleveraging

Actually if you're a restaurant and you turn out all the lights and shut off the oven, you can cut your expenses to zero. The problem is that you're now out of business.

Showtime for Visible Roots and Fruit - September 8, 2009

prior economic recoveries have relied on the expansion of debt-financed economic activity such as housing starts, capital spending, and other forms of gross domestic investment, as well as sustained automotive demand (beyond a brief Cash for Clunkers jolt). Debt-financed economic activity typically leads broader economic activity by nearly a year.

It strikes me as hopeful to expect this at present, in the face of continued deleveraging pressures, fresh highs in mortgage delinquencies and foreclosures, and a huge second-wave of adjustable rate mortgage resets on Alt-A and Option-ARM mortgages that were initiated at the peak of the housing bubble (which will become pressing beginning in November and December, and will continue through 2010 and 2011).

The deleveraging process is inevitable -- July 10, 2009

Not sure that no amount of intervention can stop the deleveraging process. My take from this data is fairly straightforward - the process of deleveraging and accrual of bad debt is dynamic and creates a vicious cycle, and no amount of government intervention would have or should have tried to stop the market forces and deleveraging process.

We are in a vicious cycle, with more houses getting foreclosed and coming to the market, leading to further price declines. A similar deleveraging process has to take place in commercial real estates, such as retail. Deutsche Bank has recently released sobering estimates regarding the prospective losses in commercial real estate. Equally, in light of the lost real estate and equities wealth, the household sector has to deleverage. Defaults in consumer credit are likely.

So as painful as it is, maybe the leveraging process has to proceed and the government should stand by ensuring only the payment system, and facilitate the deleveraging process.