Americans Are Back to Borrowing…

February 8, 2012

From today’s WSJ:

Household borrowing through credit cards, car loans, student loans and other installment debt—which excludes mortgages—rose at a seasonally adjusted 9.3% annual rate in December, following a 9.9% rise in November, the Fed said Tuesday. That was the biggest two-month surge since late 2001, when auto makers rolled out zero-percent financing after the Sept. 11 terrorist attacks.

The title of the article is Auto and Student Loans Drive Borrowing Surge.

Mr. [Troy] Davig said the latest data offer a glimmer of hope that the long process of household debt-reduction, called deleveraging, is in a late stage. That process has slowed the recovery as Americans worked to pay down debts rather than spend money on goods and services. “That’s starting to come to an end,” he said.

To be sure, household debt-reduction isn’t over. The McKinsey Global Institute reported last month that American households have wiped out $584 billion in debt since the end of 2008, mainly through defaults, but also through payments. Still, some $254 billion worth of mortgages is headed toward foreclosure, and household deleveraging likely won’t be complete until mid-2013, the report states.

Consumer spending makes up roughly 70% of our nation’s GDP. So, promoting frugality is a no-no. Paying down debt is frowned upon. Long-term, this is not a good thing.

Related: The History of the GDP and Consumer Spending

17 responses to Americans Are Back to Borrowing…

  1. “Consumer spending makes up roughly 70% of our nation’s GDP.”

    This is one of the biggest lies. NO spending makes up ANY part of GDP. Spending is spending; production is production.

    The lie comes from the way GDP is calculated, which is to add up what individuals spend, what the government spends, net exports, and the change in inventory.

    Basically, the products that make up our GDP must be purchased (either by consumers or the government), accumulated (excess inventory), or exported. Since it is easier to get those numbers, those are used as a proxy for our production.

  2. JLP said: “Consumer spending makes up roughly 70% of our nation’s GDP.”

    Jack said: “…the way GDP is calculated, which is to add up what individuals spend,…”

    Thanks for making JLPs point. Just because you disagree with how GDP is calculated, doesn’t make the statistic incorrect.

  3. It makes the SENTENCE incorrect, BG. SPENDING does not make up ANY portion of PRODUCTION, and hence spending makes NO part of GDP.

    If consumption is steady, but production goes up, the excess products are either become part of inventory or are exported.

    The reason GDP is calculated based on spending and exports is that it is impossible to properly assign a dollar value to goods that have not been sold.

  4. That statement (statistic JLP quoted) is NOT incorrect.

    If your preferred method to calculate GDP is “impossible” (your words), then we can just stop right there.

  5. SPENDING does not make up ANY part of PRODUCTION.

    Is that so hard to understand?

  6. Oh, I get it. Because if there was no spending, companies would just keep on with production instead of laying off all their employees. Thanks for clearing that up for me.

  7. Jack, how about this…

    Consumers purchase 70% of the purchased goods that are sold, with the remaining 30% being sold to business/government/exports, therefore, if demand decreases, with the expectation of a little lag due to inventory timing, it is expected production will also decrease as companies decrease production in response to rising inventory levels. This will ultimately lower the GDP.

    Seems to blend both you and BG together so you can be friends 🙂

  8. Steve) you get it, spending/production are just two sides to the same coin. You see, Jack must not (can not) acknowledge this because it goes against his die-hard beliefs.

    If he were to acknowledge this, then he would see that rich people do not create jobs, but it is the customers of the business that create jobs. And that is an unfathomable idea for someone like Jack.

  9. Spending is spending. Production is production.

    Spending CAN spur production, but the money spent must be earned or borrowed. So where will the consumers get the money?

    If there is increased domestic production without increased domestic consumption (spending), the excess produce is either exported or goes into inventory.

  10. Jack) “…the excess produce is either exported or goes into inventory.”

    Or is sold for a lower and lower price, until there is no profit and the company ceases production (decreases supply), until it is once again profitable. Spending has a causal relationship on production rates. Without customers, companies will refuse to produce.

  11. And where will the consumers get the money to purchase the goods if those who have the money do not take the risk by increasing production and paying their employees?

  12. I will agree that consumer spending can drive production — particularly in the service industries. However, “stimulus” does nothing for the economy when it takes from one consumer (through taxation or debt) to give to another.

  13. “And where will the consumers get the money to purchase the goods if those who have the money do not take the risk by increasing production and paying their employees?”

    That there is the crux of the problem.

    So far the US has been the world consumer driving business all over the globe. The best solution, IMHO, is to force China to free/fair trade agreements so US products are marketed to consumers in china. I read an article not long ago where Citigroup has just recently (this week) become the first non-Asian bank able to offer credit cards to consumers in China.

    Our borders are completely open to imports from everywhere, yet we are hammered trying to get access to foreign consumers.

  14. I think you are barking up the wrong tree, BG. We could not have a trade deficit if we did not go into debt to purchase more that we produce.

  15. “…We could not have a trade deficit if we did not go into debt to purchase more that we produce…”

    Dude, you still keep missing the point. We would produce more (locally) if we had more customers for our goods — specifically Asian customers. If US companies are not allowed access to Chinese consumers, yet Chinese companies are allowed access to US consumers — then you are going to have trade imbalances.

    US consumers purchase both US-made AND Asian-made goods, while Asian consumers purchase only Asian-made goods? Their companies have access to MORE consumers — get it?

  16. > If US companies are not allowed access to
    > Chinese consumers, yet Chinese companies are
    > allowed access to US consumers — then you
    > are going to have trade imbalances.

    …only to the amount that people assume debt. If people did not go into debt, it would be IMPOSSIBLE to have a trade deficit. As such, there would be no US consumers for the Asian products.