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Recession and Borrowing

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Recession and Borrowing

Postby L-Boy » Wed Feb 06, 2013 4:44 pm

Fairly insightful:

http://online.wsj.com/article/SB1000142 ... NewsSecond


CAPITAL Updated February 6, 2013, 1:41 p.m. ET Borrowing: Key to Recession and Recovery By DAVID WESSELL

Are we there yet?

Economic forecasting is one part numbers and one part the story that explains the circumstances of the moment.

There are always competing stories: There is so much uncertainty that businesses won't hire. Government is doing too much or too little or the wrong thing. The economy will take off only when housing does. Globalization and technology are eviscerating the American middle class and consumers aren't spending.

We have run out of new things to invent and do.

One dominant story is the "deleveraging" one. The 2000s were marked by a sharp increase in borrowing—particularly by U.S. households and financial institutions. That couldn't last and it didn't.

For the past four years, consumers and businesses have been paying down (or, in the case of many homeowners, walking away from) debt. They are deleveraging.

If banks reduce their borrowing, they will lend less. And if consumers are borrowing less (because they want to or because no one will lend to them) they will spend less—good for the long-run health of the economy but not so good in the short run.

The headwinds of deleveraging are slowing the economy to a crawl. Indeed, the only reason the economy is moving forward at all is that the government offset private-sector retrenchment by increasing its borrowing—a lot.

Measured as a share of gross domestic product, government debt is double what it was a decade ago.

The Federal Debt Ceiling is a looming catastrophe one day and a crisis averted the next. It seems a never-ending cycle. WSJ's David Wessel explains the basics of the debt limit and why you should care.
In this story, the pace of U.S. economic growth will accelerate only when consumers and businesses begin borrowing again.

Are we there yet? No. We're getting closer, but we have a ways to go.

Leverage in finance is back down to 2000 levels as markets and regulators force banks to hold more capital. Leverage in corporations outside finance—which wasn't the big problem—has come down a bit and is stable.

The economy turns, in large part, on what consumers do.

U.S. household debt has fallen by $833 billion, or 6%, since 2008, largely because there is less mortgage debt. Credit-card and auto loans are down; student-loan debt is up. Measured against the size of the economy, overall household debt is back to pre-bubble 2003 levels, as the chart accompanying this column shows.

Those are the numbers, but what's the right story?

Growth optimists tell this one: Americans increased their borrowing faster than incomes from 1950 to 2000 because they could.

Once available only to the rich, consumer credit—auto loans, credit cards, mortgages—was offered to the swelling middle class.

Borrowers and lenders got carried away in the 2000s with subprime mortgages and all that. Now the debt-to-income ratio is back on the 1950-2000 trend line so we are nearly at the point where consumers will start borrowing again, and that will fuel spending.

"Our analysis suggests that by the end of 2013 or 2014 U.S. households will be through deleveraging," says Susan Lund, research director at the McKinsey Global Institute, an arm of the McKinsey consulting firm.

Joseph LaVorgna, U.S. economist for Deutsche Bank, DBK.XE -1.50%says, "Consumers are becoming more comfortable taking on debt." The latest Federal Reserve survey of senior loan officers finds strengthening consumer demand for most loans.

The deleveraging headwind, in this story, will soon become a tailwind, reinforced by the rebound in house prices. If the economy does well this year and next, that will be the reason.

Growth pessimists tell a different tale: Just because consumer debt burdens rose steadily for half a century doesn't mean they will continue to do so. "No economic theory says that debt-to-income ratios should rise over time," says Martin Barnes, chief economist of BCA Research, who has long tracked the credit cycle.

His guess on household deleveraging: "I reckon we're halfway through."

"This bust has left a lot of psychological scar tissue," Mr. Barnes explains, recalling the American distaste for debt that lasted for a generation after the Great Depression. "Losing your home, or nearly losing your home, or watching your friends lose their homes….The American love affair with debt is kinda over."

According to this view, consumer borrowing won't come back soon enough or strongly enough to fuel a surge in consumer spending. After all, incomes are still being pinched by the lousy job market and the recent rise in the payroll tax. Employers are hiring again but there are still 3.2 million fewer jobs—and thus fewer paychecks—in the U.S. today than five years ago.

All this matters, and not only to forecasting the economy. It raises a timely and politically contentious question: How quickly (not whether, but how quickly) should the federal government reduce its deficit and begin to deleverage?

If consumers, banks and businesses are ready to borrow more, the economy can better absorb government spending cuts and tax increases than if private-sector deleveraging continues for a while.

Picking the right story is crucial.


This graph kind of tells it all.

http://si.wsj.net/public/resources/imag ... 175407.jpg



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Re: Recession and Borrowing

Postby vulcan_alex » Wed Feb 06, 2013 5:21 pm

Of course less debt is one of the things holding back our economy. Moving debt from individuals to the government is of limited use and of course without jobs the economy will not grow much. Consuming now makes jobs in some other country to a large extent so it is less effective in creating jobs. When we accept that we need to invest in infrastructure, and bring manufacturing back to the US the economy will grow, otherwise mostly like the past few years. Simple, but not in accordance with Obama's view of the world, so until he is replaced low growth and relatively high unemployment will remain.
I am a "Vulcan" and try hard to keep things logical and without emotion. However as a "Vulcan" I have a highly emotional reaction mode for special occasions.
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Re: Recession and Borrowing

Postby URGatorBait » Wed Feb 06, 2013 5:28 pm

vulcan_alex wrote:Of course less debt is one of the things holding back our economy. Moving debt from individuals to the government is of limited use and of course without jobs the economy will not grow much. Consuming now makes jobs in some other country to a large extent so it is less effective in creating jobs. When we accept that we need to invest in infrastructure, and bring manufacturing back to the US the economy will grow, otherwise mostly like the past few years. Simple, but not in accordance with Obama's view of the world, so until he is replaced low growth and relatively high unemployment will remain.



You mean we can't get there through higher taxation and higher regulation? Who knew.
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Re: Recession and Borrowing

Postby catsigator » Wed Feb 06, 2013 5:32 pm

Sorry, but you'll get no help from me. Staying debt free is a big deal with me.
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Re: Recession and Borrowing

Postby L-Boy » Wed Feb 06, 2013 5:33 pm

vulcan_alex wrote:Of course less debt is one of the things holding back our economy. Moving debt from individuals to the government is of limited use and of course without jobs the economy will not grow much. Consuming now makes jobs in some other country to a large extent so it is less effective in creating jobs. When we accept that we need to invest in infrastructure, and bring manufacturing back to the US the economy will grow, otherwise mostly like the past few years. Simple, but not in accordance with Obama's view of the world, so until he is replaced low growth and relatively high unemployment will remain.



It doesn't really seem like you got the point. The fact that you think Obama is a big factor in all this indicates maybe you didn't.

Look at this graph below


Look what household debt did in the great depression. There wasn't a big govt debt buildup (and money supply was not as aggressive) and guess what, we stayed in a depression for a decade. So govt debt CAN play a role in offsetting private deleveraging. It wasn't until WWII until we really got out of the depression, where we loaded up on government debt.

http://www.npr.org/blogs/money/2009/02/ ... s_gdp.html

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If we had followed the plan proposed by some of massive and immediate govt deficit/debt reduction the recession would probably have been a depression, similar to what was encountered in the Great Depression.

That first graph above really makes it so obvious - household debt increased massively 2000-2007 - which drove the GDP bubble. It went down, and the economy retreated, but govt debt increases offset much of the private debt decreases, which stabilized the economy.

Now that household debt may stabilize a bit, we can afford to reduce deficits gradually. However the results will still likely be flat or very low GDP growth.

Obama doesn't have any magic levers to make all of this go away.
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Re: Recession and Borrowing

Postby catsigator » Wed Feb 06, 2013 5:57 pm

What was the debt to GDP ratio in 1928?

What was it in 2007?
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Re: Recession and Borrowing

Postby L-Boy » Wed Feb 06, 2013 6:00 pm

catsigator wrote:What was the debt to GDP ratio in 1928?

What was it in 2007?



Both were around 100% - if you are talking about household debt.
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Re: Recession and Borrowing

Postby catsigator » Wed Feb 06, 2013 6:15 pm

L-Boy wrote:
catsigator wrote:What was the debt to GDP ratio in 1928?

What was it in 2007?



Both were around 100% - if you are talking about household debt.

Government.
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Re: Recession and Borrowing

Postby L-Boy » Wed Feb 06, 2013 6:47 pm

catsigator wrote:
L-Boy wrote:
catsigator wrote:What was the debt to GDP ratio in 1928?

What was it in 2007?



Both were around 100% - if you are talking about household debt.

Government.



Looks like it was around 20% of GDP in 1928. It was around 40% of GDP in 2008, on a net basis.

By 1940 it got to around 50% of GDP. Then soared to 120% of GDP after WWII

This time around, it has gone from around 40% net, to over 70%. The rate of govt debt increase has been much greater, and has probably helped avoid a repeat of the depression. Easier money helped too.

http://upload.wikimedia.org/wikipedia/c ... USDebt.png

http://www.usgovernmentspending.com/spe ... ent_Of_GDP

What is also interesting to ponder (and difficult for me to wrap my head around as to what it means) is that of the 70% US net debt to GDP, the fed owns federal govt debt amounting to roughly 10% of GDP. So if the Fed owns US govt debt, is it really substantively debt??
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