Economy: Credit Deception & Unsustainability

[unlawflcombatnt]

Once again the Federal Reserve has altered previously posted statistics in a less favorable direction. This time they've revised previously posted statistics for Consumer Credit. This increases the total outstanding consumer credit $158 billion, as of June 2006. The initially posted June 2006 consumer credit was revised upward from $2.1759 trillion to $2.3443 trillion. July added another $5.6 billion (or $0.0056 trillion) to the total outstanding credit. If July's increase is added in, it makes the new numbers for total outstanding consumer credit $164 billion higher than June's posted statistics. To put this in perspective, this is about 1.26% of our current, nominal (non-inflation-adjusted) GDP of $13 trillion. Thus from 2000, 1.26% more of our GDP was financed by consumer credit than was originally stated. This makes our current "savings" rate (Disposable Personal Income - Personal Outlays) even more negative than previously stated. These revisions can be seen in the modified copies of the charts from the Federal Reserve shown below.

The top half of the chart shows the most current numbers from September 8, 2006. The bottom half shows the previously posted numbers (prior to the upward revision) published on August 7, 2006. The comparative changes in "total" credit are underlined in red.



The top half of the above table can be found at the Federal Reserve G19. (The bottom half is from the August release is not available, as it has been upwardly revised.)

For 2005 alone, this upward revision gives an annual increase in consumer credit of $88 billion (from the previously stated $56 billion.) Thus, $32 billion more in consumer spending was financed by borrowing than was previously stated. (This "credit" spending does not include consumption spending financed by borrowed money from home equity extraction. Home equity extraction was estimated at between $600-800 billion in 2005. Of this, at least $150-250 billion went toward consumer spending in 2005.) A copy of Table 1B from the BEA's 2nd quarter GDP report (from July) can be seen below.



This above tabel can also be found at Bureau of Economic Analysis on page 12, Table 1B.

From this earlier report by the BEA from July, the reported annual personal "savings" for 2005 was -$34.8 billion. Without any additional changes (i.e., assuming GDP and consumer spending are not revised, and there are no other offsetting adjustments made) the 2005 savings would change to a -$66.8 billion. In other words, Americans spent $66.8 billion more than their Disposable Personal Income in 2005.

To give an idea of how large this is, the growth in 2005 non-inflation-adjusted GDP was approximately $744 billion. For 2005, Personal Outlays increased $563 billion in non-inflation-adjusted dollars, while Disposable Personal Income (DPI) increased only $354 billion. (In comparison, the 2004 increase was in DPI was $519 billion.) Thus, the increase in 2005 Personal Outlays was $209 billion greater than the increase in Disposable Personal Income. This is a major reversal in pattern. Not since the Great Depression in 1933 have Personal Outlays exceeded Disposable Personal Income.

Normally consumer spending has been 2/3 of total GDP. Meanwhile, Disposable Personal Income increases have been greater than 2/3 of the increase in GDP. The excess of Disposable Personal Income over Personal Outlays is the "savings" rate. Under the Bush administration, however, the excess of income over outlays has been declining. In 2004, the increase in DPI was the same as the increase in Personal Outlays, meaning there was 0 net increase in savings in 2004. This trend has continued and now the "excess" has turned negative. In 2005 consumer spending increased more than personal income. Now the increase in DPI is less than 2/3 of our GDP. In fact, the increase in 2005 was only 48% as large as our our GDP increase. To make things worse, consumer spending has actually increased to 70% of our GDP. Now there is a huge gap between consumer income and consumer spending. That gap has been filled with borrowed money from both credit cards and home equity extraction.

In 2005, the nominal GDP growth rate of 6.35% declines to 3.15% when adjusted for inflation (using the BEA's GDP deflater.) Meanwhile, the nominal increase in DPI of 4.08% declines to 0.88% when adjusted for inflation. Maintaining a GDP growth rate greater than the increase in Disposable Personal Income is completely unsustainable, especially when the gap is this large. Growth in real GDP usually reverts to a level that is less than Disposable Personal Income growth. In this case, that growth rate would be below 0.88% annually.

Again, increasing GDP through deficit-financed consumer spending is not sustainable in the long-run. We will soon find out when this short-term phenomena hits a dead-end created by its long-term unsustainablility.

unlawflcombatnt

EconomicPopulistCommentary

EconomicPatriotForum

___________
The economy needs balance between the "means of production" & "means of consumption."

[whistle]

1. So the federal debt is now clsoe to $8.53 trillion, add consumer debt

...of $2.34 tillion, that leaves what other kinds of debt? Business, right? How much is business debt?

I understand that business debt runs close to $35 trillion, so our total debt at all levels is over $44 trillion!!!

Wow, that is 3.26 times the annual GDP!!!

How can we ever pay this debt load off and still grow the U.S. economy? But, we must do this if the U.S. economy is to remain healthy.

[Warpy]

2. The balance of trade

that mounts up higher and higher every time another corporation closes a plant here and opens it up in China.

Face it, we're like a soap bubble. There's a pretty, shiny exterior but the only thing supporting it is hot air and wishful thinking.

The system is unsustainable. We are overdue for a collapse.

[whistle]

3. Not if the gambling portion of the total debts are cancelled...

...By gambling portion, I mean all the debt incurred to finance market speculation and corporate mergers, etc. That would get the shyster elements (i.e. Felix G. Rohatyn, corporate raiders, trader arbitrageurs, etc.) out of our economy. The congress should also take back its constitutional right to create money, taking that ability away from large banks to whom the U.S. becomes obligated to pay interest on that money. Then jobs and industry would begin to flow back to our economy and employment and incomes would again begin to rise.

[unlawflcombatnt]

5. Hot Air

"the only thing supporting it is hot air and wishful thinking."

Well put. Those are my sentiments exactly. And the "hot air" coming from the Corporate media propagandists, such as Larry "I-lost-my-straitjacket" Kudlow, is getting hotter and more dishonest by the day.

Americans cannot indefinitely spend more than they earn. And the longer this unsustainable process continues, the worse the fall will be.

unlawflcombatnt

EconomicPopulistCommentary

EconomicPatriotForum

___________
The economy needs balance between the "means of production" & "means of consumption."

[unlawflcombatnt]

6. Debt

I've seen numbers in the past on the various areas of indebtedness. I don't really know how much business debt there is, or if I found numbers, whether they would be reliable.

A lot of debt figures are estimates of some kind. The government's numbers are a little easier to nail down, and are supposed to be based on some type of honest recording. Of course they're very manipulated, but probably less so than others put out by such sources as Fox News or Larry Kudlow.

unlawflcombatnt

EconomicPopulistCommentary

EconomicPatriotForum

___________
The economy needs balance between the "means of production" & "means of consumption."

[PsycheCC]

4. Thanks for another insightful post on the shaky state of the economy.n/t

[unlawflcombatnt]

7. Thanks

Thanks. I'm going to try to post more information on his later, but I can't guarantee it.

[niallmac]

8. So now I understand why we spend so much on our military.

Once the U.S. is bankrupt we intend to simply
steal everyone elses wealth. Outlaw Nation.

[1932]

15. That's not such an exaggeration. And it not something that hasn't been

happening already -- which was Raol Castro's point at the Non-Alligned Nations summit in Cuba. He said that the US's 1B per year military spending when they have no Cold War any longer is going somewhere -- it's going to promoting an irrational economic situation where the mighty exploit the weak.

[kineneb]

9. hole, meet shovel

hole deeper...

Thanks again for the analysis. I always look forward to your posts.

[fuzzyball]

10. There are ONLY 2 ways to solve the excessive debt problem....

there is NO 3rd way possible!!!

1. Create hyper inflation by juicing the printing presses
____and flood the economy with dollar bills. Voila...the debt
____is then paid back in much cheaper, inflated dollars.

2. Let there be a huge deflation (aka depression) which will
____clean out the debtees via bankruptcies.

My guess is the govenment will choose option 1.

[MadHound]

11. I think you might be mistaken

If you look at the Great Depression, you'll find that the rich and well off were quite happy with it. After all, in their eyes, it was a buying opportunity. I think that the same will hold true this time around. Besides, lending institutions would be much happier repocessing homes and such, turning around and selling them for half their worth than being paid back in hyper inflated dollars. Under that scenario, the money they get is worthless. At least with the house, they can hold onto it until inflation comes down.

[fuzzyball]

12. History does not jive with your hypothesis...

Germany and Argentina are prime examples.

You are correct in that the very rich will benefit from a
depression, but they do not control government policy.
Bill Gates does not sit on the Federal Reserve meetings,
where decisions are made on how much paper money to print.

There are actually very very few politically active people
amongst the top 1% richest people. And the people making
monetary policy decisions are no where near the very rich.

[rman]

13. Corporations spend millions lobbying govt to pass legislation

that's favorable to those same corporations. And it's the rule rather than the exception for business people to go move back and forth between politics the corporate world. They do have a lot of control over government policy.

It's not coincidence that both Hitler and Mussolini came to power thanks to support from Big Business and Big Money from various nationalities.

[unlawflcombatnt]

14. Monetary Expansion

Most of the "optimists" think the government will try to prevent a recession by dropping the interest rates again, and attempting to create another bubble so consumers can borrow money to make up for their constantly declining real wages.

Many economists think that the Fed will drop interest rates, but that it won't be enough, and we'll still slip into a recession anyway.

I agree with those economists. I don't think we're going to be able to prevent it by printing more money or lowering interest rates. At best, it'll prolong the bubble, and make the crash even bigger when it finally occurs.

unlawflcombatnt

EconomicPopulistCommentary

EconomicPatriotForum

___________
The economy needs balance between the "means of production" & "means of consumption."

[1932]

16. We'll probably have to dust-off the manuals from the price control board.

We're going to have to elect a democrat who addresses the incredible polarization of wealth -- we're going to have to get money in the hands of working, middle class people, and then we'll probably need price controls to prevent inflation.

[unlawflcombatnt]

17. Agreed N/T

[unlawflcombatnt]

18. Wealth Distribution

I couldn't agree more. Though some unevenness of wealth distribution is necessary for capitalism to work, excessive unevenness will cause the system to malfunction as well. There must be enough wealth in the "consumer" class to purchase goods and services produced by capital and labor. If that spendable consumer wealth declines, so does consumer spending and production demand. Without production demand, there is no need for labor or capital to provide that production. All the capital in the world does no good whatsoever unless there is sale of production to provide returns.

There is a point at which unevenness of wealth distribution is excessive, and there is not sufficient money in the hands of consumers to purchase the goods necessary to drive the economy to its maximum. That point has been reached. Now a downward redistribution of wealth would help the economy overall, especially consumers and workers, but also the most affluent in the long-run. Investors need consumers to maintain their profits and their wealth. Without them, their own wealth will eventually decline as well.

unlawflcombatnt

EconomicPopulistCommentary

EconomicPatriotForum

___________
The economy needs balance between the "means of production" & "means of consumption."

[1932]

19. I think of it this way too:

Money is like fertilizer. Where it accumulates, things grow. When all the money accumulates in the hands of the very wealthy, I'm not sure that much grows that benefits society. But when it accumulates in the hands of working people you can think of the benefits as more than simply they have money to stoke aggregage demand (although that is the simplest way to describe what happens). I think of it as good things growing from giving working people money -- first, you reward work, which encourages even more productive, SOCIALLY-beneficial labor. You also reduce indebtedness which allows working people to make more rational decisions and act less often out of desperation. You also help them invest in the collective future by giving them the chance to educate their children as effectively as possible. You also allow them the time and the resources to come up with innovations which improve society. Society grows best when money accumulates in the hands of working people.

Although I am convinced that increasing the minimum wage would have almost no inflationary effects, I do think that there is such a huge polarization of wealth that if we shifted to a more sensible distribution of wealth as fast as we need to to prevent the collapse of our society, there probably would be some risk of inflation. This is just by virtue of the size of the problem that needs to be fixed. But we have to do it. And I suspect that we'd have to have price controls, just like we did during the Great Depression when they fixed the same huge problem the same way, and just like we should have had in the early 70s, when Nixon tried a half-assed price control strategy to prevent inflation.

[unlawflcombatnt]

20. Good Analogy

The fertilizer analogy is excellent. Too much fertilizer in one spot kills everything in that spot. Too much money in the hands of the rich, at the expense of consumers and workers, kills consumer spending, consumer demand, and investment opportunities. Money misappropriated away from consumers towards investors results in less returns on investment, and has the effect of too much fertilizer by killing investment returns.

The Bush dictatorship operates under the delusion that more investment capital means more jobs. They are categorically wrong. No jobs are created without at least anticipated demand for increased production. Increasing investment capital (which is already overabundant at present), creates NO jobs in our current situation. In contrast, increasing consumer spending power would create jobs. But such "spending power" increasing policies are not popular with Bush's corporatocratic supporters, because it would temporarily reduce their exorbitant profits.

unlawflcombatnt

EconomicPopulistCommentary

EconomicPatriotForum

___________
The economy needs balance between the "means of production" & "means of consumption."

[AX10]

21. Remember the trade deficits are staggering too.

[unlawflcombatnt]

22. Yes

Trade deficits are completely out of control. We have a $200 billion annual trade deficit with China alone. Some are estimating that this year's trade deficit might reach $1 trillion. This total is simply the difference between how much we buy from foreign countries and how much they buy from us. This cannot continue to increase without some type of "hard landing" based on this deficit alone.

[PsycheCC]

23. kick. worth reading!

:bounce:

[Nimrod2005]

24. k