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Households pay down debts for first time

Thursday, December 11, 2008, 4:03 PM

Mayday! Mayday!

This next story outlines a dire condition for a debt-based monetary system:

WASHINGTON (MarketWatch) - Stung by the loss of $2.81 trillion in their net wealth, U.S. households paid down their debts in the third quarter for the first time since at least 1952, the Federal Reserve reported Thursday.

As of Sept. 30, households' total outstanding debt shrank at an annual rate of 0.8% from $13.94 trillion to $13.91 trillion, the Fed said in its quarterly flow of funds report. It's the first decline in household debt ever recorded in the report.

Consumer debt actually reversed.   This strange behavior has never before been observed in this data series and it goes back to 1952.

Whether we use an "outside-in" empirical approach to observe that debt and money have been created in exponential amounts over the past six decades, or an "inside-out" approach to demonstrate a mathematical requirement for the exponential creation of money/debt, we come to the same conclusion:   We live in an exponential money system.

For this reason, the failure of consumer debt to expand at the required rate is very big news.   What's "the required rate"?  Roughly the aggregate rate of interest on all outstanding debts.

It seems that the hit came from the first ever recorded drop in mortgage debt:

Households paid off more mortgage debt than they took on for the first time on record. Mortgage debt fell at a 2.4% annual rate to $10.54 trillion. Other consumer debts, such as credit cards and auto loans, increased at a 1.2% annual rate in the quarter to $2.6 trillion.

I am not certain if the mortgages were paid down or defaulted upon, but the article implies that they were paid down.  I am less sure of that given the massive foreclosure rates that are plastered all over the news.

Given that consumers are not pulling their weight, how is the system being held together?  Readers of the last two Martenson Reports will not be surprised by the answer:

Total U.S. domestic nonfinancial debt increased at a 7.2% annual rate, boosted by a postwar record 39.2% increase in debt taken on by the federal government.

You can try and understand all the confusing alphabet soup lending facilities offered by the Fed, and try to track details of all the new borrowing by the government, but it is all really very simple to understand if we back up a bit. 

New borrowing and lending is being undertaken by the Fed-government axis at a rate sufficient to equal all the outstanding interest payments on prior debts.  

Without this new money creation defaults by somebody somewhere in the system is guaranteed.

Compounding the difficulties of the monetary and fiscal authorities is the fact that debts are already defaulting at a horrific clip.

All in all this leads me to conclude that when it comes to borrowing and new money creation, we haven't seen anything yet.

And still, even in the face of overwhelming evidence that there is an illness that lurks within the very design of the money system itself, there is precious little commentary on that subject in main stream media or the dominant political parties.

It's time to change that.

 

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20 Comments

Woodman's picture
Woodman
Status: Diamond Member (Offline)
Joined: Sep 26 2008
Posts: 1028
Re: Households pay down debts for first time
cmartenson wrote:

I am not certain if the mortgages were paid down or defaulted upon, but the article implies that they were paid down.  I am less sure of that given the massive foreclosure rates that are plastered all over the news.

 Is the mortgage debt decline also due to the drop in home sales, and those that are are buying are paying less? 

I think I read refinances have increased lately due to low interest rates - so you'd think people would be tempted to take extra cash out, but maybe housing prices have dropped so much they have no equity to draw on! 

DrKrbyLuv's picture
DrKrbyLuv
Status: Diamond Member (Offline)
Joined: Aug 10 2008
Posts: 1995
Re: Households pay down debts for first time

Stung by the loss of $2.81 trillion in their net wealth, U.S. households paid down their debts in the third quarter for the first time since at least 1952, the Federal Reserve reported Thursday. As of Sept. 30, households' total outstanding debt shrank at an annual rate of 0.8% from $13.94 trillion to $13.91 trillion, the Fed said in its quarterly flow of funds report

Chris Martenson said: I am not certain if the mortgages were paid down or defaulted upon, but the article implies that they were paid down. I am less sure of that given the massive foreclosure rates that are plastered all over the news.

Karl Denninger (The Market Ticker) had some interesting things to say about this: 

No they didn't. 

What really happened is that households defaulted on mortgages at an increasing rate, and in all other categories of debt they are attempting to stay ahead of (what are inevitable) defaults there too by adding to credit card exposure! 

Further:

Total U.S. domestic nonfinancial debt increased at a 7.2% annual rate, boosted by a postwar record 39.2% increase in debt taken on by the federal government. 

Right. The government is accelerating the train - and the mountain is clearly visible and getting closer at an increasing rate of speed. 

What a load of crap.

PS: Most of this "new debt" being taken in an insane attempt to prevent the contraction in GDP that must occur will default as well. Have a look at the earlier Ticker from today; the math is what it is, whether people want it to be that way or not.

We have taken a 10% GDP drop in 2000 and turned it into a 20% one in August of 2007. Now, with the actions of the last year and change (especially the last six months) we've turned that into a thirty percent GDP correction that must occur (that is, an increase of 50% in SIX MONTHS!) and if we don't stop this crap it will nearly double again by next June.

 

Xflies's picture
Xflies
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Joined: Aug 19 2008
Posts: 157
Would you rather have seen consumer debt increasing??!!

I would think that a decent amount of this stat might be indeed defaults but ask yourselves this...

What if Consumer Debt actually increased?! What would your first reaction be? Positive? Negative? I would think most people here would have a negative view on increasing Consumer Debt and I can already see the headlines..."Where is the consumer going to get the cash to pay off their debt?", "The debt laden consumer will cut spending further", "We're doomed! Go buy guns and gold while you can!"

If your answer was that your views are negative no matter what the outcome, then my friend, you need to gain some perspective. Do as much research and reading to make informed decisions but if you find yourself not being able to make objective decisions, many of your decisions will be doomed.

Personally, I think the deleveraging we are seeing throughout the world is just happening on a micro level with consumers. They're deleveraging and some are defaulting. I think deleveraging to the consumer also means a reshaping of consumer behaviour and learning to live with less... which in the end, is a good thing. It is nice to see consumers cut back their debt, to possibly learn to live with just 1 car and 1 tv instead of 3 of each... it cuts back on wastage and energy consumption.

Now all we have to do is to figure out how to stop the stupid packaging of goods we buy. How long does it take you to rip off packaging and throw it in the garbage? Wouldn't that represent the fastest wastage of assets you've ever seen?

Lemonyellowschwin's picture
Lemonyellowschwin
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Posts: 561
Let me see if I have this right . . . .

Credit must continually expand to pay off old debt.  If it doesn't, there will be cascading defaults inward.  There is no stasis in the system.  It is grow . . . or die.

BUT the Fed-government axis won't go down without a massive war.  So, they will borrow and then print to try and replace the dollars that are being wiped out by the implosion.  They are the only ones who can, after all.

It's a real predicament.

djhester1940's picture
djhester1940
Status: Bronze Member (Offline)
Joined: Sep 22 2008
Posts: 35
Re: Households pay down debts for first time

High Chris,

I just wanted to let you know that I really appreciate getting your reports and updates in my e-mail.

With regards to the store manager that is having a problem with too much product coming into the store and not being able to store it let alone sell it, I saw this story on the TV just before Thanksgiving about the number of cars that have backed up in the ports where the cars are delivered from overseas. The report indicated that there were literally thousands and thousands of cars backed up in the port in Los Angeles. They showed a picture of the port with all of the cars and it seemed to go on for ever. So this phenomenon of too much product is also occurring in a number of other industries. I think the report stated that Toyota alone had over 250,000 cars backed up in ports all over the United States. Dealers don't have any space to take the new cars on so they just stack up in the ports.

I just finished teaching a group of retirees your crash course. The course took six weeks; each class being one and a quarter hours. I taught the course in the context of a problem-solving format that I posted on your website earlier when I began teaching this class. I started out with 25 students and ended up with about 20 finishing the course. The Thanksgiving holiday sort of broke up the course and the last two classes were not quite as filled as the other classes were.

During the first couple of classes, I heard a lot of gasps and there was a lot of concern from the participants in the class. But as I said most of them stuck it out and were very appreciative of getting the information.

The day after I finished the class on debt, I received an offer from my mortgage company (Chase Home Finance) providing me the opportunity to take out a loan for $417,000 at an interest rate of 6.49%. I was enraged. I took that generous offer to the class the next week and passed it around. This is about the dumbest thing I've ever seen. That is it was until a month later when I got the same offer for 5.99%. Quite obviously Chase had not vetted me because there is no way I could possibly pay for a $417,000 loan. I'm retired and I'm no longer working for one thing. I ran the numbers using the 6.49% and calculated the payments on a 30 year mortgage. The monthly payments would have been $2632.98 or 360 payments. The total payments would be $947,874.87. The total finance charge would've been $530,874.87.

I'm so angry about this that I have decided that in January when my CDs mature, I am paying this mortgage off and explaining to the person that takes the payment that the reason why I am paying the mortgage off is because of their stupidity in sending me an offer to borrow all that money. Isn't this the kind of thing that got us into much of this mess in the beginning.

Just thought I'd share some thoughts with you.

Don

DrKrbyLuv's picture
DrKrbyLuv
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Posts: 1995
Re: Would you rather have seen consumer debt increasing??!!

Xflies-

I think we agree that the big problem is that debt is growing at an unprecedented rate.I don't have the numbers but strongly suspect that the reduction in consumer debt is the result of defaults. However, this is only part of the story.

More important, our GDP is shrinking which makes the debt even more difficult to repay. Karl Denninger referenced this important chart and commentary: 

blank

Karl Denninger went on to say:

In 2000 our GDP was approximately $10 trillion. At 270% of GDP that would place total debt at $27 trillion dollars.

The
reported GDP in 2007 was $14 trillion (again, give or take one.) At
360% of GDP this places total debt at approximately $50 trillion
dollars.

Assuming a linear appreciation over that seven year
period we have a total GDP expansion from 2000-2007 of approximately $2
trillion annually over seven years, or $14 trillion in total of
"salutary" GDP expansion over that seven year period.

But - total debt went from $27 trillion to $50 trillion, or an expansion of $23 trillion dollars.

Of course the debt taken on is spent on something, which means it shows up in GDP.

Has the light bulb come on yet?

Let
me explain this in very simple terms - again, assuming more-or-less
linear expansion of the debt (which is in fact not true since claimed
GDP expanded, so the growth in debt rate is actual a derivative
function) there was actually a $9 trillion dollar contraction in GDP
over the previous eight years, since taken-on-debt that is spent is not
actual output expansion any more than I am "improving my wealth" if I
go borrow $200,000! In fact I am damaging it because I must not only
pay the $200,000 back I must pay interest as well!

That's right
folks - we haven't had an expansion in GDP over the last eight years.
Congress and its organs of reporting economic "facts" have lied. We
have in fact actually seen about a 10% contraction in real GDP from
2000 levels; all of the so-called "expansion" of the Bush
Administration has been a lie intended to prevent recognition and
working through of the recession that should have happened in 2000.

If
you as an American are wondering why it seems you've been taking it in
both holes for the last decade, with your real purchasing power
decreasing, and have felt "forced" to take out home equity in order to
maintain your standard of living (not to mention charging up your
plastic until it smokes) now you know the truth. In fact your
purchasing power has been destroyed; you have had a real 10% or more
deficit in actual buying power .vs. where you were in 2000.

None of this is an accident.

The
worse news is that we have taken a 10% contraction in GDP, which was
necessary and could not be prevented in 2000, and through the "magic"
of debt and compound interest turned it into something far worse. In
order to recover equilibrium we will now have to shrink GDP by close to
30%, and if our government doesn't quit dicking around and trying to
prevent this contraction from taking place it will be far worse.

How much worse?

Government
has already added another $2 trillion to the debt tab which means that
they have added more than 10% to the amount of contraction necessary in
nine months time, and they are still adding to the bill!

This
lunacy must stop. If it does not by mid 2009 we will be so far
underwater that we could literally see GDP cut in half, which would be
a depression far worse than the 1930s.

To put this in stock
market terms - if this lunacy does not stop here and now the S&P
500 will trade at TWO HUNDRED and the DOW will trade under TWO
THOUSAND, with the damage lasting for more than a decade. Unemployment
will reach TWENTY PERCENT on U-6 (and well north of 11-12% on the
government's "claimed" number.)

This is mathematics folks.
Politics and politicians can lie through their teeth but they cannot
change the mathematical realities of finance and compound interest.

Xflies's picture
Xflies
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Posts: 157
Re: Would you rather have seen consumer debt increasing??!!

This is all so true and well laid out in CM's Crash Course but my point in the post wasn't about the validity of the argument... it was about perspective of the reader.  People will complain that I do nothing but complain, but most of my posts have been geared to just trying to have the average reader here ask themselves a few quesitons while they're doing their due diligence by being on this site and not just coming here for their daily dose of bad news. 

 Is the fiat money system to blame for this ever increasing need for an expanding money supply?  What if we didn't have a fiat money system... let's say it was gold based.  Would the world stop expanding?  Would this affect the way of life we have now, would we not have the technology we have?  I think we would... but that's a whole other topic.

 Let me jump back to the purpose of my original post... Let me ask you, what would you rather see?  News that consumers increased their borrowing or this current news that consumer borrowing has decreased?  If your answer is that neither is good news and that everyone should focus on building their bomb shelter, then I would suggest that someone's perspective has been lost.  If 2 very different outcomes which obviously lead to different scenarios, still lead you to the same conclusion, what does that mean about the conclusion?

 Now, perhaps the true answer is indeed that no matter what happens with changes to consumer behaviour, that we're all doomed but

 1.  I believe that changes to our lifestyle whether it first come in the form of deleveraging and then moving to get used to less extravagance,

2.   and like CM says, I believe we can change the future

and in order to do this, we need to be perspective and objective or maybe, just maybe we'll miss the real solution when it comes... if we have already made up our minds on what is to happen, how can we be open to new ideas and new solutions?

ckessel's picture
ckessel
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Posts: 483
Re: Would you rather have seen consumer debt increasing??!!
Xflies wrote:

I think deleveraging to the consumer also means a reshaping of consumer behaviour and learning to live with less... which in the end, is a good thing. It is nice to see consumers cut back their debt, to possibly learn to live with just 1 car and 1 tv instead of 3 of each... it cuts back on wastage and energy consumption.
Now all we have to do is to figure out how to stop the stupid packaging of goods we buy
. How long does it take you to rip off packaging and throw it in the garbage? Wouldn't that represent the fastest wastage of assets you've ever seen?

xflies,

Excellent post!  I think this subject needs a lot more attention. The quantity of resources and energy used to simply package product would seem to actually exceed the product itself. That said, we could presume a 50% reduction on that alone. 

 

DrKrbyLuv's picture
DrKrbyLuv
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Re: Households pay down debts for first time

Xflies -

Sorry if I have come across negative but I'm just trying to put a number of pieces together for a bigger view - and the bigger picture shapes up to look like we have been seeing serious contraction. The debt levels take on a whole different perspective when you look at Karl Denninger's graph and commentary. Not only is our overall debt skyrocketing - but our GDP is simultaneously shrinking.

We need to see things as they are to best prepare.  

 

caroline_culbert's picture
caroline_culbert
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Posts: 624
Re: Would you rather have seen consumer debt increasing??!!
ckessel wrote:

Re: Would you rather have seen consumer debt increasing??!!

I know... I was wondering the same thing as I read this in the Times.  The National Bureau of Econ. Research is not too bright.

Davos's picture
Davos
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Re: Households pay down debts for first time

I think when we talk about debt we need to remember that we have over 5 times the amount of debt off balance.

The Social Security Trust Fund is empty, Medicare parts A and D and some misc. This is over 53 trillion.

I think the USA is a subprime borrower. 

Mike Pilat's picture
Mike Pilat
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Posts: 929
Re: Households pay down debts for first time

We obviously can't service the interest payments on all of this debt and future obligations. We will default, either directly, or through inflation, or some combination of the two. There is no other way. It's time to accept it and move on.

T's picture
T
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Re: Households pay down debts for first time
StudentOfJefferson wrote:

We obviously can't service the interest payments on all of this debt and future obligations. We will default, either directly, or through inflation, or some combination of the two. There is no other way. It's time to accept it and move on.

Not when treasury yield is at 0%.  Anything times 0 equals 0 so there won't be any required interest payments.  This indicator and the rest are clearly evidences of deflation spiral.  You won't get inflation again until World War III.

T's picture
T
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Re: Households pay down debts for first time
Davos wrote:

I think when we talk about debt we need to remember that we have over 5 times the amount of debt off balance.

The Social Security Trust Fund is empty, Medicare parts A and D and some misc. This is over 53 trillion.

I think the USA is a subprime borrower. 

Do you think anyone will lend to subprime borrower at 0% interest rate?

T's picture
T
Status: Member (Offline)
Joined: Nov 12 2008
Posts: 11
Re: Would you rather have seen consumer debt increasing??!!
Xflies wrote:

I would think that a decent amount of this stat might be indeed defaults but ask yourselves this... What if Consumer Debt actually increased?! What would your first reaction be? Positive? Negative? I would think most people here would have a negative view on increasing Consumer Debt and I can already see the headlines..."Where is the consumer going to get the cash to pay off their debt?", "The debt laden consumer will cut spending further", "We're doomed! Go buy guns and gold while you can!" If your answer was that your views are negative no matter what the outcome, then my friend, you need to gain some perspective. Do as much research and reading to make informed decisions but if you find yourself not being able to make objective decisions, many of your decisions will be doomed. Personally, I think the deleveraging we are seeing throughout the world is just happening on a micro level with consumers. They're deleveraging and some are defaulting. I think deleveraging to the consumer also means a reshaping of consumer behaviour and learning to live with less... which in the end, is a good thing. It is nice to see consumers cut back their debt, to possibly learn to live with just 1 car and 1 tv instead of 3 of each... it cuts back on wastage and energy consumption. Now all we have to do is to figure out how to stop the stupid packaging of goods we buy. How long does it take you to rip off packaging and throw it in the garbage? Wouldn't that represent the fastest wastage of assets you've ever seen?

While deleveraging is good in principle the problem is if it happens too quickly and too disorderly you may have essential infrastructures being destroyed as collateral damage.  When that happens for instance - if crops are no longer economical to be harvested and transported, you'll end up in an odd situation where food rots in the field while people starve to death.  It can only lead to one result quickly - a massive global thermal nuclear exchange to wipe out all excess population.

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johndaniels
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Posts: 31
Re: Households pay down debts for first time

I simply do not believe this report.

 The FED has no obligation to tell the truth to the american people.

 

But lets say it is true:

 

I am sure debt is decreasing solely because going further into debt is NOT AN OPTION to the american consumer... credit card companies are reducing credit lines, therefore people are suddenly maxed out. The result? they pay just over the minumum payment, reducing their debt but they cannot go deeper.

 

is this a positive trend, or a harbinger of credit defaults? I think the latter...

Davos's picture
Davos
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Re: Households pay down debts for first time

T:

Personally? As good a chance as Enron had in the final days.

Headless's picture
Headless
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Posts: 363
Re: Households pay down debts for first time

Xflies,

Re:

"This is all so true and well laid out in CM's Crash Course but my point in the post wasn't about the validity of the argument... it was about perspective of the reader.  People will complain that I do nothing but complain, but most of my posts have been geared to just trying to have the average reader here ask themselves a few quesitons while they're doing their due diligence by being on this site and not just coming here for their daily dose of bad news."

When people correctly prounounce a verdict of "Guilty" as to the persistent disingenuous tendencies of government and the media, they are not being "negative," they are "being" Righteously Enraged. 

"And when thrown within the firey pit, the advocate said, 'This is going to be the worst meal you've ever had.'"

Question found on application for Devil's Advocate

Why did the chicken cross the road?

If you answered:

1) To get to the other side ("You're not qualified.");

2) How do you know that it crossed the road? ("You're overqualified.");

3) It may have crossed the road, but why dwell on that? ("Can you start today?")

 

 

 

caroline_culbert's picture
caroline_culbert
Status: Platinum Member (Offline)
Joined: Oct 2 2008
Posts: 624
Re: Households pay down debts for first time
Nonzeroone wrote:

 

"And when thrown within the firey pit, the advocate said, 'This is going to be the worst meal you've ever had.'"

Question found on application for Devil's Advocate

Why did the chicken cross the road?

If you answered:

1) To get to the other side ("You're not qualified.");

2) How do you know that it crossed the road? ("You're overqualified.");

3) It may have crossed the road, but why dwell on that? ("Can you start today?")

That's too funny!!

xpatUSA's picture
xpatUSA
Status: Member (Offline)
Joined: Dec 8 2008
Posts: 12
Re: Households pay down debts for first time

The contrast between the Fed's need for debt growth (to service the current economy) and the basis of family financial counseling (like on PBS) is amazing!

All those who followed the PBS lectures must now be smiling, myself included Cool. Houses paid off, car notes paid off, credit cards paid off and cut up, hard assets accumulated in place of saving wimpy dollars in a bank savings account with it's whopping 1% APR.

The Fed's efforts to get us all accumulating more debt appear to this novice to be self-servicing, benefitting only the likes of the Rothschilds. And it seems like they'll see us all in the poorhouse before they relent and throw us a few crumbs. Look not to be saved by the next administration - they control nothing, IMHO.

 There, I feel better now!

 T.C.

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