The Great Deleveraging Lie: A Must-Read Post On The State of Credit Markets
This post debunking the myth of deleveraging in the U.S. economy was on ZeroHedge yesterday and was written by Jim Quinn of TheBurningPlatform.com. It’s a must-read for anyone who’d like to test the credibility of financial chatter on TV. Here’s a couple of excerpts and two key charts, and go read the full story for some great commentary on mainstream financial media:
Below is a chart that shows total credit market debt as a % of GDP. This chart captures all of the debt in the United States carried by households, corporations, and the government. The data can be found here. During the Great Depression of the 1930′s Total Credit Market Debt as a % of GDP peaked at 260% of GDP. As of today, it stands at 360% of GDP. The Federal Government is adding $4 billion per day to the National Debt. GDP is stagnant and will likely not grow for the next year. The storyline about corporate America being flush with cash is another lie. Corporations have ADDED $482 billion of debt since 2007. Corporate America has the largest amount of debt on their books in history at $7.2 trillion.
Now we get to the Big Lie about frugal consumers paying off debts, cutting up those credit cards, and eating Raman noodles 5 nights per week. Household and non-profit debt, which includes mortgages, credit card debt, auto loans, home equity loans, and student loans peaked at $13.8 trillion in 2008. After two years of supposed deleveraging, frugality and mass austerity, the balance is $13.5 trillion. Consumers have buckled down and have paid off 2.2% of their debts, it seems. But wait. A simple search of the Federal Reserve website reveals that banks have charged off 5.66% of all their loans in the last two years. The charge off rate in the 2nd quarter of 2010 was 6.66%. To verify for yourself go to the Federal Reserve website.
Total Debt Balance & Its Composition
So, let’s get down to the nitty gritty. If consumer debt was $13.8 trillion at the end of 2008 and the banks have since written off 5.66% of that debt, total write-offs were $800 billion. If total consumer debt now sits at $13.5 trillion, then consumers have actually taken on $500 billion of additional debt since the end of 2008. The consumer hasn’t cut back at all.
