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Thursday, May 07, 2009

Atlas IS Shrugging

No, no, this is not about anybody named John Galt or any book that Ayn Rand wrote. This is about the Hero of The American Consumption Revolution - a man much honored by the Chinese factory labor. That steely-jawed spending machine (let's just call him Tom Spendthrift) has flinched, and flinched hard.

Consumer Credit (G.19) for March just came out. On an SA basis, revolving credit notched up a nice set of negatives for the last half of a year: -6.2% in Q4 08 and -6.5% in Q1 09. For March (these figures are preliminary) revolving credit is reported as -6.8%.

To understand what this MEANS, my geeky, nerdlike friends, one must know that outstanding revolving credit (mostly credit cards) is reported at 931.9 billion at the end of March. At the end of 2007, outstanding revolving credit was 969.9 billion, and at the end of 2006, it was 902.3 billion. At the end of 2008 it was 992.3.

Whoa, whoa, whoa! These are like those price rollbacks at WalMart. Outstanding credit just keeps going down, down, down!

Outstanding revolving credit grew at about 330 billion from the end of 2004 to the end of 2007. However people actually charged far more - during this period many people refinanced their homes and paid off their credit cards, then bounced joyously off to start the whole cycle again.

But last year, the boom lowered. Cashout mortgages are now viewed with some considerable disdain. You can cash out all right, but you need to have some substantial equity in your home to do so, and that's not the case for many of these rolling refi customers. So even in 2008, consumers were far more conservative with those cards.

Then the Obama administration. Back in February and March I pointed out that the Obama administration's stupid banking tricks act had just blown the recovery. There are multiple moving parts to this dioxin-on-the-green-shoots drama, but imposing a stress test at the same time that accepting government money was going to be used to curtail actual banking executive remuneration equated to applying a cattle prod to the rear of the big banks, who control most of the credit card industry. Combined with rapidly rising unemployment, the result was going to be ugly for Bernanke's lovingly nurtured garden of green shoots.

And the result was (as detailed in this DU thread on the topic):
My Capital one: 6.49% to 15.99%
My Discover card: 10.9% to 15.99%
My Chase card: 7.9% to 15.99%
My credit score is 758
There is actually justification for this, based on expected and observed charge-off rates. Your FICO means nothing if you lose your job and end up running up your CCs to pay for living expenses. Such credit cards are going to be mostly write-offs with or without bankruptcy. In order to detect such impending chargeoffs, the big credit card issuers have adopted a range of techniques to detect people who seem to be using their credit cards to offset a major drop in income. Buy with your CC at WalMart? You may find your credit limit cut. Charge groceries? The same. If you don't usually carry a balance, there have been wholesale cuts in credit limits almost across the board.

So Americans have decided to pay off their bleeping debts. There is another cohort of people who had been resting comfortably with relatively little cash on hand although comforted by the idea that their available 30K-50K on credit cards could see them through a period of unemployment. Most of those people just got their credit limits cut in half over the last few months. If you don't have rolling balances, the CC line managers do not look at a sudden doubling of your outstanding credit with favor. They know what it means - that you are suddenly out income, probably out of a job, and are now likely to run up 10-15K in CC debt and default on the bulk of it.

What's the total effect on the economy? Well, probably there will be a net subtraction of far over 100 billion a year compared to recent years. If people are paying down their credit card debts from income, not only are you out the amount of spending they would have put on credit cards, but you are out the amount of spending that they divert to pay those puppies.

Second, people who have relatively high incomes but have in recent years considered their emergency savings fund to be their HELOC and CC credit limits are being reeducated to save. So they, who could continue spending, are now drawing back on the spending to put a few months worth of expenses in the bank. This is quite rational, and will bear fruit in future years. The debtloaded consumer has to unload before he can continue funding a Chinese expansion.

The real amount charged but not paid from income in the boom years was far higher than the 330 billion I cited. That's because a lot of the debt was rolled into refis based on ever-growing home values. In short, a lot of consumer spending was funded by the transitional method of credit cards but really paid for by Mortgage Equity Withdrawal, or MEW.

CR at Calculated Risk has been writing about Mortgage Equity Withdrawal's impact on the economy for years. I refer you to his January, 2007 post estimating the impact of MEW reductions for 2007.

As it turned out, CR (always more rational than the average citizen), forecast a MEW slowdown somewhat earlier than it happened. In January 2008 he revisited the question, and published this graph that showed MEW falling during 2007, but still (as a percent of DPI) far above all but the wild years of Greenspan's joyous ride into the sunset on the stallion of extremely low interest rates. Of course CR was correct that MEW would lower in 2008 and constrict consumer spending.

In March of 2009, CR came back to the question and noted that 08 4th quarter MEW was actually calculated as negative. (See graph here.) Using CR's own formula of 50%, that's about - 35 billion in the fourth quarter.

As relative impact on consumer spending in comparison to the recent past, the combination of negative MEW plus paying off high-rate consumer credit plus trying to build cash cushions to replace available credit is likely to pull at least 250 billion out of spending in 2009, and the effect will continue for some time. All of that 250 billion won't come out of the retail stores. Some of it will be seen in limiting other services, vacation spending, and delay of plans for home improvements or new building.

This is why the very-little-stimulus stimulus bill was not such a good idea. Consumers can either go bankrupt and write their debts off or pay them off, but regardless, consumer spending is going to be quite constrained. You cannot expect consumers to carry this economy forward in 2009. They aren't going to be shouldering that much of a load in 2010 either.

If you are wondering why I am so certain that people are replacing credit lines with cash, the evidence lies in H.8, Assets and Liabilities of Commercial Banks. It is possible that economists such as Mankiw have never heard of this gripping publication, which is why I bother to mention it here. (That would account for his apparent belief that the US citizen saves by stuffing wads of money in his or her underwear, and thus can be induced to spend by declaring one tenth of currency illegal tender in a year. In fact, the average citizen saves by either paying down debt or depositing money in the bank, and it is the bank vaults that would take the loss.)

Anyway, if you look at H.8's NSA bank deposits from March 08 to March 09, you see several interesting things. Large time deposits have shrunk substantially. A lot of that is corporate cash, so this is not surprising. But transaction accounts have grown substantially - from 615 billion to 701.6 billion. Deposits in non-transaction accounts ex large time deposits have grown from 4,164.5 billion to 4,810.5 billion.

We have a situation in which WIET is dropping (some induced by the tax credit and changes in withholding tables), BEA agrees and reports declining personal income, bank balances are growing and consumers are paying down credit. All of that adds up to bad times for retail in the near future.

However BEA also reports real disposable personal income to have grown over the course of the first quarter (a big jump in January, followed by a February drop and flat in March). That is probably true and tracks relatively closely with my figures, but having more real disposable income (overall) does not redress the effect of having significant credit card balances and getting interest rate hikes of 5-9% on them. Ultimately, the pattern shown here is rational.

The surveys showing jumps in consumer sentiment therefore do not translate into plans to spend. People do seem to be spending on smaller things. In my roaming, I have noticed that many stores are expanding home and garden, which is a sure sign that they are seeing more interest there. But overall, this appears to be a time in which many consumers are reevaluating their overall strategies and recouping their positions.

The other determinative factor which will strongly affect the economy's behavior over the rest of 2009 is small business.

You are on the right track, but the whole process can be simplified.

Raise the monthly minimum payment requirement on NEW PURCHASES to 10% of the outstanding balance. Lower interest rates to 9.99 percent.

ELIMINATE recurring, usurious 30% interest rates on old debt, and reward people for paying back old debts that they gave up because of the spiraling interest costs by waiving those interest charges on debt that older than two or three years.

The stimulus package was not needed. All that was needed was INCENTIVE BASED CREDIT CARD PROGRAMS that encourage and reward customers who pay down their debt.

We are being had by Wall Street and the bankers, and I am not sitting for it.

Please join my Chase Bank and Credit Card industry protest at Daily-Protest.comIf you want to do more than just visit my site, make a sign that says Daily-Protest.com and put it in a storefront window, on a bulletin board, or on a countertop, and help me grow this movement.

Thank you.
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