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Saturday, May 07, 2016

Decline of household debt

The Federal Reserve is up to its customary statistical obfuscations. It no longer releases the L.1 Credit Market Debt Outstanding report; Q1 2015 was the last one available. Instead, it's releasing something called D.3 Debt Outstanding by Sector, however, under this new accounting, Federal debt somehow dropped to $2,959.2 billion from $13,086.7 under the old report for the very same quarter.

That's a neat trick. Hey, presto! And $10 trillion in debt vanishes. I'll have to figure out how the two definitions differ. At first glance, it looks like they simply redefined it as State & Local debt, as that is nearly $10 trillion higher than before.

What is interesting, though, is that D.3 now provides a Household Home Mortgage line. As Steve Keen suggested, this actually peaked BEFORE the crisis began, sometime in 2007, at $10,613.0 billion. It's now at $9,490.6, and has been flat for the last three years, bottoming in Q3 2014.

Household Consumer Credit, on the other hand, is doing better. It peaked in 2007 as well, at 2,615 but has risen to 3,533.1 since. So overall, Household debt has been flat for nine years, but $1 trillion in debt that was previously backed by real estate is now sans collateral. Corporates have $1.5 trillion in additional debt since 2008, but Financials have $2.8 trillion less. The end result is debt disinflation.

This is the problem Steve Keen was describing, which is an insufficient amount of credit money being created to permit any economic growth. We can certainly argue about whether to take the concept of GDP seriously or not, and about whether the government can, or should, create more credit money, but regardless, the available evidence does appear to fit his Minsky model.

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42 Comments:

Blogger RobertT May 07, 2016 4:20 PM  

Pure bull shit. What I'm looking at is a collapse of profits nationwide. At least that's happening in my practice.

Anonymous Jim Mortensen May 07, 2016 4:24 PM  

It's easy, just reinterpret the debt as 'absolute value profits' then starting spending this awesome new profits!

Blogger Stilicho May 07, 2016 4:25 PM  

The conclusion assumes economic growth is only possible through expanded debt.

If we follow that to the logical conclusion, then the govt should make direct negative interest loans to every citizen. You'd get "growth", but the result would be potemkin growth a la China and it's empty cities.

Regardless, the corporate sector is awash in easy credit and the only use they seem to find for it lately is stock buybacks. That's not economic growth.

Blogger Silly But True May 07, 2016 4:26 PM  

@VD
I don't believe 2nd para. assumption is correct. L.1 report for State and Local Governments includes note that retirement funds are excluded (which we know is major underfunded problem that courts are starting to get testy about; see recent City of New Orleans Fireman's fund lawsuit where Mayor Landrieu was about to get put on house arrest or start funding it).

D.3 report doesn't appear to have the same fine print; the value is reasonably much higher.

Silly But True

Anonymous Dole May 07, 2016 4:26 PM  

To be frank, to me this seems like the cart has been put before the horse. I don't see any difference between FED buying government bonds (or other assets) with new FED money, and government selling bonds to private sector and thus creating new credit money. Admittedly, maybe I am still holding an old fashioned view and there is something I am missing.

Anyway, I would say the credit is not being created, because the economy is in the toilet, rather than that the economy is in the toilet because credit is not being created. The FED can prevent the deflationary spiral by pumping ever greater amounts of money in to the market, but they can't boot the economy, which is dependent on other structural variables. Focusing too much on the money side can be detrimental. I will have to read more of Keen's offerings to catch up on everything he is saying though.

Blogger Dire Badger May 07, 2016 4:42 PM  

Dole- You seem to be underestimating the tech sector's ability to suck up inflation.

There's a reason I like Trump, because breaking foreign trade promises to both jack up inflation and cripple the tech sector's inflation sponge... which is fueled by overseas tech manufacturing.

Without massive inflation (and hopefully eventually creating a new currency) matched by growing average wages, there's no possible way America can get out of it's hole. Any current negative growth is going to be stagnant until we can crawl out from under the boulder.

Anonymous #8601 Jean Valjean May 07, 2016 5:14 PM  

We can certainly argue about whether to take the concept of GDP seriously or not, and about whether the government can, or should, create more credit money

Banks create credit money. The government actually creates equity for the private sector when it deficit spends, as per Keen.

Blogger bob k. mando May 07, 2016 5:23 PM  

just so everyone knows, Chuck Tingle's Voxman avatar is the character 'JP' from the movie Grandma's Boy, currently on the MTV rotation. looks really bad.

you may now continue your off topic econ discussion.

Anonymous #8601 Jean Valjean May 07, 2016 5:23 PM  

A Stilicho If we follow that to the logical conclusion, then the govt should make direct negative interest loans to every citizen.

Already happening in Europe. People are RECEIVING interest on their mortgages.

If I were offered a negative interest rate, I'd borrow as much as possible but wouldn't spend it. I'd keep the principal safe, maybe in a literal safe, because it will have to be paid back. Then just sit back and collect the interest.

Anonymous Roundtine May 07, 2016 5:41 PM  

This article describes the collapse of the eurodollar credit markets: State of the Eurodollar System; The Outrageous and The Absurd

The banks have stopped creating the purely credit based eurodollars.

What is left open to debate is causation, and only because these official channels have undertaken the official position wholeheartedly. The mainstream view is that banks have never been healthier, especially as the US economy has undergone sufficient restoration as to now have come supposedly close to “overheating.” To find instead this kind of shrinking, shirking and withdrawal is hard against that narrative and it leads to any number of absurd attempts (not just in derivatives) at bridging the obvious disparity.

Blogger weka May 07, 2016 5:48 PM  

@3. Growth through expanded debt

Sort of. You need capital invested into productive things... farms, factories or people who produce. The mortgage is an investment in a slice of your salary, for instance.

What the Austrians thought would happen with debt balloning, and what usually happens, is that all the good investments are taken and then asset bubbles happen as the money chases something. This is happening in Auckland and Vancouver property markets, for instance.

But the US Federal system is a vacuum cleaner sucking all the fiat debt directly into their system. Their budget is continually underfunded by design and the debt will never be paid. They have run out of the sane peoples' money.

So the next step, already happening, is that the US buck will stop being a medium of exchange. The end game will be a default and the rembi or rouble being used instead, while the Harriet Tubman is worth as much as the equivelent Argentinian Peso.

I'm hoping it will just take out the Fed. The scenario could be worse.

Blogger Unknown May 07, 2016 6:13 PM  

After the massive credit expansion that happened during the go-go fraud years of the housing boom, the correction that _should_ have been allowed to happen in 2008, wasn't. All those bad debts were not cleared by default or bankruptcy, but were instead propped up by massive money printing emissions into the problem banks and to the Federal government by the Fed.
Of course the Fed is going to play with their reports, just like the Treasury does with theirs, and the Department of Labor does with their unemployment report. To acknowledge reality is to have the entire house of cards they have constructed collapse around their ears.

Blogger Were-Puppy May 07, 2016 6:16 PM  

I hope this isn't a foolish question.

If they are tracking personal debts, do they account for bankruptcies?

Anonymous Dole May 07, 2016 6:41 PM  

Dire Badger - I believe you too are not understanding the causality of the situation correctly.

Inflation is not a good thing. Rather, the lack of business activity causes bank lending to fall, which causes the amount of credit money and thus inflation to fall. Thus during bad economy there is not a lot of inflation to speak of. In the long run good economy causes deflation as the amount of money falls relative to the produced goods (if the FED doesn't pump more base money into the market - which has been happening for decades and decades now).

Why is this important? Because by assuming that by creating inflation you are rescuing the economy, you are in fact only making things worse. It's like expecting that driving a fire truck will generate a fire - in reality all you are doing is burning gasoline. The corruption in the process is extreme, as the Fed picks winners and losers (generally the banks and the government are the winners).

Currently the economy is bad, but there is no deflation either, because of all the pump priming by the Fed. I am not expecting this to change, the MMT schools has simply been wrong on the deflationary spiral. The Fed is fully capable of fighting deflation to any degree by pumping more money into the markets. As we can see, most of it seems to boost the stock markets / government bonds through the banking system. It really is somewhat silly... Meanwhile the government is enacting regulations such as Basel that require such enormous quantity of capital from the banks that making any sort of profitable investments becomes difficult.

Blogger bob k. mando May 07, 2016 7:11 PM  

useful production is wealth. it's what allows lower skill people to make a living in the 'service economy'.

money is not wealth and wealth is not money.

allow me to demonstrate by offering you a legal tender bill of the $1 beelion Zimbabwean dollar variety.

Blogger bob k. mando May 07, 2016 7:30 PM  

Chick Tingle has a youtube account ...

Blogger Rusty Fife May 07, 2016 8:01 PM  

bob k. mando wrote:Chick Tingle has a youtube account ...

That's gold.

Anonymous mature craig May 07, 2016 8:04 PM  

Vox you really so amazing work and you have massive amounts of honor and integrity I'm really sorry for being an immature obnoxious jerk sometimes 10-12 years ago

Blogger praetorian May 07, 2016 8:14 PM  

The conclusion assumes economic growth is only possible through expanded debt.

Also, it occurs to me that Keen talks only about nominal GDP. A gentle fall in the price level would have the same effect as a government/bank duo generating monetary growth, without the early receiver problems, no?

Blogger Michael Maier May 07, 2016 8:21 PM  

So what would a good monetary policy would be at this point?

As in, having to deal with reality NOW, not what we wish it would be.

Anonymous Godfrey May 07, 2016 8:51 PM  

The economy will not grow until it is once again based upon capital accumulation instead of credit expansion. How long that will take is anyone's guess. The elites want debt serfs. People with capital aren't serfs, they're free men.

Anonymous Cash May 07, 2016 8:57 PM  

Granted I am super rusty on my economics and this is not well thought out....

Should we focus on the philosophy and business and come up with something?

The whole thing is so screwy and it feels like we've been waiting for something to happen one way or the other with the economy for years now. We in the US have had our debt crises but it may not be over; there certainly hasn't been a recovery in the debt growth as we have seen. But there wasn't a wash out that would allow for real growth.

Perhaps we should look more at Aristotle and less at the current bozos.

Or look more at business. Plenty of prosperity comes from sources other than debt. Real wealth comes from productivity yet so much of our "wealth" comes from asset prices going up due to debt. And if you've been in or around the real estate game you know that most of these developers are always going from deal to deal. These guys never have money.

Maybe we should say economics has been debunked so lets build something based off of business, philosophy, and what kind of communities we desire.

Anonymous Cash May 07, 2016 9:11 PM  

@21 I had a long response written out that was lost. Hate when that happens.

TL;DL "the economy" is really abstract. It doesn't actually exist yet we talk about it like it is our favorite football team.

You are right that capital accumulation is wealth and freedom and that is not what the masters want. They want a super charged economy, a rat race.

Perhaps like I was saying in my last post we should look more at business. I remember a few years ago some guys saying that "they are not participating in the recession."

Maybe that is better economics than all this other crap.

Blogger Lazarus May 07, 2016 9:39 PM  

Cash wrote:@21 I had a long response written out that was lost. Hate when that happens.

Don't do that. I don't. win/win

Blogger Unknown May 07, 2016 9:44 PM  

@20 Stop borrowing, start prosecuting, starting with the Fed and working down to the banks.

There has been no _official_ inflation, but have you priced your typical medium fast food meal lately? Or seen the unit size of everything at the supermarket shrink?
Inflation is happening, all right. It isn't showing up in the official measure, because the official measure of inflation is being gamed.

Blogger Noah B May 07, 2016 10:02 PM  

One nation under fraud, with a litany of injustice for all.

Blogger James Dixon May 07, 2016 10:07 PM  

> So what would a good monetary policy would be at this point?

Any good monetary policy would have to take the current debt load into account, and since current economic theories of choice ignore the debt level, that's not going to happen.

Any policy that did account for the debt load would immediately result in the dramatic reduction of government borrowing and thus government spending. Again, that's not in the government's interest, so it's not going to happen.

As to what policies might be best, I'd have to recommend that you check out the guest of last night's Brainstorm session, Steve Keen: http://www.debtdeflation.com/blogs/manifesto/

Blogger James Dixon May 07, 2016 10:11 PM  

> It isn't showing up in the official measure, because the official measure of inflation is being gamed.

The official measure of inflation has been being gamed since Bush the Elder. Just like the official measure of unemployment has been gamed the entire Obama administration.

Blogger Thucydides May 07, 2016 10:27 PM  

Maybe I'm old fashioned or failing to comprehend this, but my belief is what we are seeing is similar to the start of the Great Depression of 1929, where massive debt overhangs from the Great War silly pulled the global economy down. No one was trying to deleverage, and the machinations of the UK in trying to maintain the Pound Sterling as the "global currency" (and the efforts of the other Powers to deal with this) simply created an unstable situation where collapse was almost inevitable.

Today we have a massive debt overhang caused by decades of welfare spending, and the mechanization of the US Federal Reserve to keep the US economy from deflating, rather than standing aside and letting the market clear. This happened in previous depressions prior to the creation of the US Federal Reserve, and the 1923 Depression, which the government of the day simply closed their eyes to so the markets could clear.

So rather that trying to continue to feed inflationary fires, or push more credit upon non credit worthy people, there are two "outs":

1. Stand aside and let the markets clear. Deflation, revaluation of currency and all the associated things that happen during this period will hurt, but it will be like ripping off a band aid. The problem, of course, is the current situation may be unstable, but politicians and their clients are making a killing, and hope to be insulted from the effects of their activities.

2. Remove the regulatory and tax barriers to increased productivity. Only massively increased productivity can "soak up" all the money being spread around and lead to real economic growth.

OK, so the question is: where am I wrong in my analysis, since this tracks with my understanding of economics?

Blogger James Dixon May 07, 2016 10:33 PM  

> OK, so the question is: where am I wrong in my analysis, since this tracks with my understanding of economics?

Well, those probably aren't the only two ways to deal with it that would work. But other than that, I don't see anything wrong with your analysis.

Anonymous Roundtine May 07, 2016 11:21 PM  

The time from the Oct 1929 crash to May 1931 Kredit-Anstalt was about 19 months. If we date the current depression only as far back as 2011 when the stimulus effects ran out in China (the country created the most new credit by far and was responsible for most marginal growth in the global economy), we are close to 60 months. Yet in the U.S., New orders for non-defense capital goods, ex-aircraft), are already at 1998 levels. Another gauge of new manufacturing orders has been falling for 2 years, almost matching the length of the 2000-2002 manufacturing recession. Yet we are still not officially in recession. What's happening right now is unprecedented.

Blogger LP9 Forever Solidified in Gold! Rin Integra S.I.G. May 07, 2016 11:28 PM  

Wow, more math manipulations. In the NE the vibe seems to be people are declining in debt while there must be a increase in collections and debts written off as unaccountable and uncollectable or hidden losses like a shadow stat or something.


I'm really sorry I missed out on Keen but hopefully in the future I'll be there to listen and enjoy rational thought.

Blogger Lazarus May 07, 2016 11:39 PM  

Canadians ended 2015 with a record-high debt burden, as low interest rates and still-soaring regional housing markets fuelled the fastest year of household debt growth since 2011.

Canadian and American economies mirror each other so I would suspect shenanigans.

Its codswallop.

Blogger Unknown May 08, 2016 1:07 AM  

#29 The 1929 crash was made worse, and extended, by heavy government interference in the economy. There was a similar crash in 1921, while Coolidge was President (and co-incidentally, Hoover was VP), and due to medical reasons Coolidge was unable to do anything for months following the crash, and by the time he was healthy enough to come back to work, the crash had largely dissipated, and recovers was starting. Hoover wanted badly to muck about with the economy, but he wasn't the HMFIC, so there wasn't anything he could do. He had his chance 8 years later, and screwed it all up. FDR came in after him and just made it all worse.

Blogger bob k. mando May 08, 2016 2:03 AM  

23. Cash May 07, 2016 9:11 PM
@21 I had a long response written out that was lost. Hate when that happens.



always, ALWAYS copy to at least the clipboard before attempting to post.

Ctrl+A
Ctrl+C

click the publish button

if transmission error

Ctrl+V and resubmit


if you've got something really big that may run into the character limit, you may want to copy that out into Word or something



29. Thucydides May 07, 2016 10:27 PM
1. Stand aside and let the markets clear. Deflation, revaluation of currency and all the associated things that happen during this period will hurt,



you ignored the destruction of the dollar and the institution of a new currency.

current US debt stands at nearly 20 trillion. the FedGov / FedReserve *cannot* permit interest rates to rise, as that would immediately collapse the delusion that the FedGov is paying it's way.

any rational interest rate ( +5% ) makes Federal ( to say nothing of the individual States ) debt service completely untenable. debt service would instantly become by far the largest line item in the budget.

without an honest interest rate, you can have no honest economy. the bankers / Congress have put us in a box and there's really no good way out.

China is certainly not going to be very pleased with us if we announce that we're defaulting ....

Blogger Bob Loblaw May 08, 2016 2:37 AM  

If we follow that to the logical conclusion, then the govt should make direct negative interest loans to every citizen. You'd get "growth", but the result would be potemkin growth a la China and it's empty cities.

That's pretty much the logic behind QE, though QE has the side benefit of lowering interest rates so the government can roll over its debt more cheaply.

Anonymous Exurban May 08, 2016 6:39 AM  

#34 Unknown

In 1921 Warren Harding was President and Calvin Coolidge was Vice-President.

Blogger Ahazuerus May 08, 2016 7:38 AM  

@Stilicho

American corporates have been cannibalizing themselves for over two decades now; buying back their own stock with savings from downsizing. Hollowing out their future, even as they proclaim that people are their greatest asset, by eliminating people and bidding up their own short term stock prices.

In other words, the management class has been defrauding shareholders in the name of adding shareholder value, using the system of incentives that they designed, to enrich themselves at everyone else's expense.

A great reckoning is coming, for the simple reason that you cannot build a successful economy on lies.

Blogger James Dixon May 08, 2016 9:34 AM  

> China is certainly not going to be very pleased with us if we announce that we're defaulting

Why do you think the Fed is so determinedly trying to restart inflation?

> In other words, the management class has been defrauding shareholders in the name of adding shareholder value

Pretty much, yes. Share buybacks benefits to investors are greatly overstated. Shareholders would be far better off if the money were used for dividends.

Anonymous Jack Amok May 08, 2016 12:19 PM  

The conclusion assumes economic growth is only possible through expanded debt...the corporate sector is awash in easy credit and the only use they seem to find for it lately is stock buybacks. That's not economic growth.

Most of us here understand this, instinctively at least, even if we can't always explain it (not a surprise, considering how bastardized economists, politicians and banksters have made the language around it).

For decades now we've had a Ponzi scheme economy. "Growth" was either financial institutions shuffling money around, retailers selling us cheap crap, or real estate developers churning out cheap locations for the retailers to operate out of. Oh, and let's not forget incompetently planned and executed government transportation projects.

None of that "growth" represented an increase in productivity. In fact, it was negative towards productivity because it had to extract resources from the productive sector to fund itself and make it's payouts. That's what makes it a Ponzi scheme - there's no real underlying investment being made with the money ("growth"), so more money ("growth") coming in is always required to keep the scam swimming.

Blogger E. Harris May 09, 2016 3:34 AM  

This comment has been removed by the author.

Blogger SciVo May 13, 2016 5:31 AM  

Jack Amok wrote:The conclusion assumes economic growth is only possible through expanded debt...the corporate sector is awash in easy credit and the only use they seem to find for it lately is stock buybacks. That's not economic growth.

Most of us here understand this, instinctively at least, even if we can't always explain it (not a surprise, considering how bastardized economists, politicians and banksters have made the language around it).

For decades now we've had a Ponzi scheme economy. "Growth" was either financial institutions shuffling money around, retailers selling us cheap crap, or real estate developers churning out cheap locations for the retailers to operate out of. Oh, and let's not forget incompetently planned and executed government transportation projects.

None of that "growth" represented an increase in productivity. In fact, it was negative towards productivity because it had to extract resources from the productive sector to fund itself and make it's payouts. That's what makes it a Ponzi scheme - there's no real underlying investment being made with the money ("growth"), so more money ("growth") coming in is always required to keep the scam swimming.


Yeah. Nate wasn't entirely wrong about inflation, but it all went into assets instead of consumer goods, because of what the people at the Fed discount window buy.

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