Deflationary Trends in Consumer Credit

A few charts from the New York Fed Quarterly Report on Household Debt and Credit will help put into perspective the deflationary forces facing the Fed.

Household Debt and Credit Developments in 2012 Q3
Aggregate consumer debt fell again in the third quarter, by $74 billion, continuing the nearly four-year downward trend in household debt. As of September 30, 2012, total consumer indebtedness was $11.31 trillion, 0.7% lower than its level in the second quarter of 2012 and down $1.37 trillion from the 2008 Q3 peak.

Mortgages, the largest component of household debt, continue to drive the decline in overall indebtedness. Mortgage balances shown on consumer credit reports continued to drop, and now stand at $8.03 trillion, a 1.5% decrease from the level in 2012 Q2.

Home equity lines of credit (HELOC) balances dropped by $16 billion (2.7%).

Non-mortgage household debt balances jumped by 2.3% in the third quarter to $2.7 trillion, boosted by increases of $18 billion in auto loans, $42 billion in student loans, and $2 billion in credit card balances.
Total Debt

click on any chart for sharper image

The deleveraging (deflationary) trend in consumer debt is unmistakable.

Number of Loans

There is certainly no jump in the demand for credit card, mortgage, auto, or home equity loans.

Loan Delinquencies by Type

Deleveraging of credit card and mortgage debt continues. Some deleveraging is via default. The rest is slow, steady debt reduction with reluctance to take on more debt. 

The increase in student loans (and delinquencies as well) buck the deleveraging trend for two reasons

  1. Student debt is government guaranteed
  2. Student debt cannot be discharged in bankruptcy

Guaranteed or not, students have no way to pay back their debt as real wages for college grads declines while tuition costs soar.

Please see Trends in College Tuition vs. Bachelor’s Degree Wages; Demographics of Student Loan Debt History for some very interesting as well as surprising charts on student debt demographics.

Non-Mortgage Balances

Auto loans have recovered a bit (primarily because cars eventually wear out). Yet, auto loan balances remain below the 2005 peak.

The only item preventing a huge plunge in non-mortgage debt is student loans.

The Fed has been fighting consumer deleveraging with round after round of QE but the above charts show it has not spurred consumer demand for credit. Those rounds of QE have, for now, put a bid on financial assets (stocks, bonds and commodities) but has done nothing positive for the real economy.

More specifically, those rounds of QE have artificially lowered interest rates, destroying those on fixed income in the process.

For a discussion as to how Fed policy is tantamount to outright theft for the benefit of banks and the wealthy, please see Hello Ben Bernanke, Meet "Stephanie".

Mike "Mish" Shedlock


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