Consumer Credit Thoughts

One of the most interesting pieces of macroeconomic thought I've stumbled upon is Steve Keen's research on credit and its role in the economy. Start here for more information. The basic gist is that neoclassical economics greatly underestimates the role of debt creation in driving overall aggregate demand. Aggregate spending (on both consumption and financial assets) includes national income and the change in debt in the economy. In hindsight, it does not seem to be a large leap to pin much of the current malaise on the resultant unwind of the buildup of private and financial debts over the prior decade to finance asset purchases (homes, mortgage backed securities, LBO loans). A similar, if less technical, line of thought flows through Gary Schilling's research and book The Age of Deleveraging. It would follow that monitoring stock and flow of public and private debt should be a core part of measuring the health of the US and global economy. Given that I tend to subscribe to Schilling and Keen's views that current debt levels are likely unsustainable in the long run and that we are in for an extended period of deleveraging, the current consumer credit figures caught me by surprise.
   The November Consumer Credit figures show an increase of $20.4bn (top 1% of historical changes [fig.1], top 21% when scaled by GDP [fig.2]). This is not what one would expect in a period of sustained deleveraging. November's figure is part of a broader period of releveraging on the part of the consumer and falls squarely into the range of prints during the heyday of the housing boom. The savings rate, currently at 3.5%, has fallen from as high as 8.3% in May of 2008 (show inverted in fig. 3). It's hard to know what to make of this current trend. With housing prices still retreating at low levels and retirement plans underfunded across the board, it bucks common sense that the American consumer is willing to continue to reduce savings in the face of 8+% unemployment. That said, it suggests caution in taking an overly negative stance on the economy in the very near term. Consumer confidence has risen vertically since the August lows, and perhaps that renewed optimism has brought with it a willingness to lay down the credit card a little more openly.

Fig.1: Overal Change in Consumer Credit

 Figure 2: Chg. In Consumer Credit / GDP

 

Figure 3: Total Consumer Creidt (w/ rate of change [lower]) & Inverted Savings Rate