It’s Not Over – The Collapse in Household Credit Says So

Monday, August 10, 2009

Executive Summary

• Be wary of early declarations of victory.
• Household credit/borrowing is way down and likely to stay that way.
• Getting "back to where we were" will require an improbable return to levels of household borrowing seen at the height of the bubble.
• Bankruptcies, foreclosures, and credit defaults indicate the consumer is still sliding downwards.
• Recovery cannot yet be detected within the consumer and household data.

There is much to be thankful for today. The efforts that have been extended to rescue the financial system have bought some time, and I am extremely thankful for that time, because it is the most valuable asset of all.

However, the speed of the putative recovery, which strikes me as "too much, too soon," comes with the risk that the next phase of the crisis will be advanced upon us much faster than I had hoped or expected. 

A rapid return to global GDP growth will assure that the next energy crisis will come sooner, faster, and harder than if we approached the future with greater caution and more planning.

In June, in Green Shoots? Not Yet, I wrote this: 

Frankly, I am a little bit surprised that the billions and trillions of bailout and stimulus dollars have not yet appeared anywhere in the base consumer data.  I guess that’s what happens when the trillions are handed out to the top of the pyramid instead of the bottom.  Collectively, this data is saying that the consumer is tapped out and still in heavy retreat-and-retrenchment mode. 

I would have thought that by now we would have seen some of those trillions leaking out into the real world.  So far they seem to remain fully entrapped by a still-imploding banking system, and perhaps that’s where they will remain.  If so, this means that even more money will have to be thrown at the problem, in order to return us to a path of growth.

And then in July, in Inflation Vs Deflation, I wrote: 

While I am confident that the distant future most likely consists of a world of less, not more, I expect we will not get there in a straight line. My belief is that there’s a business cycle or two in front of us.

As