UNPRECEDENTED PLUNGE IN CONSUMER CREDIT CONTINUES
Courtesy of The Pragmatic Capitalist
Consumer credit fell 13% year over year in a sure sign that the deleveraging cycle is alive and well. Consumers are paring back on credit in an unprecedented fashion.
Those who are curious as to why this recession is different from past recessions need look no further than the following chart. You’ll notice that consumer credit is falling at a rate that has never been seen before. In fact, consumer credit declined marginally during the 1991 recession and actually climbed throughout the 2001 recession. Why is this important? An economy that is based on a fractional reserve banking system has trouble expanding if the debt in the system does not continually expand. Consumers are still deleveraging and that means a robust and sustainable recovery is unlikely to occur.
The biggest risk in such an environment is not whether the consumer recovers – the consumer needs to deleverage and clean up their balance sheet – but whether the government continues to pummel the currency and rack up massive debts as they try to dig our way out of the debt hole. These are the same mistakes Japan made in the 90’s. Let’s hope we wise up and stop the printing presses before they cause an even larger boom/bust cycle….