There was an eyebrow-raising piece in the WSJ on Friday, Families Slice Debt to Lowest in Six Years.
The opening sentence contains a rather laughable leap:
U.S. families—by defaulting on their loans and scrimping on expenses—shouldered a smaller debt burden in 2010 than at any point in the previous six years, putting them in position to start spending more.
How marvellous. Through the hard work of throwing around nickels like manhole covers — plus a whole lot of defaulting — consumers have succeeded in dialling the clock all the way back to, wait for it, the salad days of the MEW-fuelled consumption frenzy, just before the personal savings rate went negative.
(MEW, lest we forget the acronyms of the boom, stands for “mortgage equity withdrawal.”)
Via the Fed, average household debt-to-income levels peaked around 130%. Now down to 116%, the suggestion that families are “in position to start spending more” is akin to a morbidly obese man — who has just come off a heart attack — feeling he can celebrate the loss of a few pounds by eating whole cheesecakes again.
The happy miracle of the past two years has been a putting-off of consequences. Deleveraging hasn’t really happened. Slimming down and cutting back hasn’t really happened — on the whole at least.
Behind the scenes there are some real changes taking place, as the WSJ reports:
Morari Shah, a 59-year-old Miami entrepreneur and real-estate investor, is among those taking a radical approach to reducing debts.
Since late 2008, he and his wife have slashed their total debt from nearly $1 million to zero by walking away from the mortgages on four rental properties and paying off two others, all of which lost about half their value in the housing bust. He’s no longer taking up to $4,000 from his monthly income to pay mortgage interest that the rental income didn’t cover.
Instead, he and his wife are fulfilling their goal of building a new $350,000, four-bedroom home in the Dallas suburb of Lewisville, where they plan to retire. “It’s a big relief,” said Mr. Shah. “We went through some rough times, but now I’m comfortable and don’t have to worry about my retirement.”
Mr. Shah isn’t alone. Jon Maddux, chief executive of YouWalkAway.com, a California-based company that advises people on how to default on mortgage debt, says he’s getting between 200 and 250 new clients a month, up 8% from last year and about 50% from 2009.
“I thought we were going to be done with this in one or two years,” said Mr. Maddux, who started the firm in 2008. “Now, we’re three years into it, and it looks like it probably will peak this year or next.” He said the average client sheds about $250,000 in mortgage debt.
People are also fixing their finances the hard way, by boosting the portion of their income that they use to pay down debt. The personal savings rate averaged 5.8% in 2010, up from a low of 1.4% in 2005, and back to a level last seen in the early 1990s.
“In position to start spending more?” Sounds more like a readiness to start spending less… permanently.
And yet, one further wonders: Without the major rise in defaulters like Mr. Shah, would total debt levels have fallen much at all?
In The Great Compression, we noted the almost superhuman strength of consumer retail stocks, tying it to the activities of the “over-employed” (the minority counterpart to the under-employed) and the general spending habits of the top 30%.
A trend of debt reduction by the most brutal means — outright default — further highlights the 70/30 split.
In thinking about aggregate consumer debt levels, one further has to ponder what 70-six million retiring baby boomers are going to do (the vanguard of which are now past age 60-five).
There is also the question of how a double dip in home values could affect spending habits, not to mention a severe stock market correction (assuming we ever get one of those again).
Since time immemorial the U.S. consumer has been a cash cow to the world, happy to be milked for ever more leverage on a diet of imported cud. But how long can this go on?
In other words: Should a contraction in debt levels from 130% to 116% be taken as a cheery sign there is room to lever back up again? Are consumer balance sheets like a balloon — or a remarkably elastic cow’s udder — that never stops inflating?
Or is that decline of indebtedness the start of a lasting trend?
Things look different from this side of the crisis. Companies survived — and thrived — by trimming fat and squeezing costs, especially labour costs, with tremendous efficiency.
Food and energy prices, marching higher, are now more expensive on a relative-to-income basis than ever before. State and local income taxes are rising, even as public wages and budgets are cut.
It has long been estimated that 70% of U.S. GDP is driven by consumer spending. That heavy spending, in turn, accounts for something like a sixth of global demand. In an age of consumer deleveraging — following a multi-decade trend of ever greater leverage and debt — it would make sense for this big picture number to adjust downward.
A structural shift lower in consumer spending is a natural offshoot of higher food and energy prices, a logical response to wage and employment pressures, and a fittting tie-in to boomer retirement (as those on fixed incomes spend less, and those thinking about retirement anticipate the need to save more).
For these reasons we wonder how much longer global growth can rely on a free-spending U.S. consumer — just as we wonder how long mercantilist currency policies can support current trade arrangements.
At some point, a fall in aggregate consumer debt levels will have to lead to real, honest-to-goodness deleveraging — a downtrend in borrowing and spending, as opposed to just another re-leveraging “buy the dip” opportunity as serial bubble blowers desire.