“…LIVIN’ ON MONEY THAT I AIN’T MADE YET…”

11/15/13

The New York Fed came out with its quarterly report on consumer debt yesterday.  Conventional thinkers are nearly overjoyed at the news that total consumer debt increased by $127 billion, or 1.1%, for the third quarter, the fastest pace since 2008. 

Some of this increase in debt came about because of fewer mortgage foreclosures and bankruptcies during the third quarter.  As regular readers know, it was bankruptcies and foreclosures, or nice ways of describing stiffing one’s creditors, that provided Wall Street economists an opportunity to wax joyful about the “deleveraging” and “balance sheet clean-up” that the American consumer was “achieving.”  Now that we are stiffing fewer of our creditors, it seems that debt outstanding is going up.  The obvious suspicion, therefore, is that debt in any realistic sense has been going up all along but that a trail of sorry creditors was masking our continuing propensity to take on debt in order to achieve the “lifestyle” we are somehow entitled to simply by virtue of living in the United States of America.

Other observations arise from the New York Fed data.   First, those who think that taking on more debt to excrete away more money on stuff we don’t need is the key to our economic recovery, while being overjoyed at the increase in debt levels, are sullen and down-in-the-mouth that credit card debt is barely growing; it was up $4 billion, or 0.6%, in the third quarter.  Though we would prefer actual decreases in credit card debt to mere slowings of its increases, those of us who are so benighted as to think that we have to learn to save money again see this slowdown in revolving credit accumulation as a favorable development.   Perhaps our sanguinity is poorly placed.   Just as I was reading about the slowdown in the growth of credit card debt, I heard an ad on the radio from a mortgage broker who was preaching the fiscal soundness of refinancing one’s credit card debt by taking out mortgage debt.   One wonders how much the return of the popularity of this game of financial three card monte had to do with the slowdown in the growth of total credit card outstanding in the third quarter.  More importantly, one sees the return of the highly popular dinner out financed with a thirty year mortgage as yet another reminder of the people’s short memories and another sign of financial trouble down the road.

Second, the widely advertised big culprit in the increase in consumer debt is the increase in student loans, which passed $1 trillion last quarter by increasing $33 billion, or 3.3%.   Mark my words:   this surge in student debt, and the growing acceptance of student debt as something one takes on in the perfectly normal course of one’s life, is not only an enormous financial problem for the borrowers and for the economy on a whole, but it is speeding us down the road to making higher education yet another “free” entitlement.  

There are some who ascribe to the Obama Administration enough Machiavellian cunning to believe that the whole defecation show that ObamaCare has become is just a ploy to get the American people to throw up their hands and beg for a single payer health system as a solution to the intentionally inflicted maladies the Affordable (Says who?) Care Act has thrust upon them.   Whether yours truly gives the Obamaites such credit is open to question.  But I can easily see the growing, and increasingly unrepayable, pile of student debt as a Machiavellian way of getting the government to pay for college by simply forgiving the debt, thereby stiffing those of us who made the sacrifices, and choices, necessary to pay for our own kids’ education.   That’s government for you.

Third, even though student debt is supposedly the most salient source of increasing consumer debt, people don’t mention that car loans outstanding went up even more on a percentage basis, or by 3.8% to $845 billion.  I’ve said it before and I’ll say it again:  nearly all the prosperity we are seeing in the auto business and in the auto stocks has been manufactured by the Fed.   Other than housing, what industry benefits more from engineered interest rates than the automobile business?   All this talk of pent-up demand is largely nonsense.   Yes, the fleet is old but one can drive a modern car hundreds of thousands of miles with little difficulty.   What we call pent up demand would stay pent up were it not for the cheap financing Ben Bernanke’s War on the Elderly has provided for new car buyers.   Auto sales are a bubble that would burst quickly if the low interest rate elixir is ever removed.   This is, of course, yet another reason that the Fed cannot let rates normalize, on either the long or short end, any time soon, but that is another conversation.