Friday, December 28, 2012

Household debt down to levels not seen since the 1980s!

(h/t to Matt Franko on this)

It looks like household balance sheets are really starting to become quite healthy. Check out the chart of the Fed’s “Financial Obligations Ratio.” It’s a measure of the total amount of monthly debt service (mortgage, rent, car payments, insurance, credit cards, etc) for an average household, as a percentage of its income. The lower the ratio, the less of a burden monthly debt service is. As you can see, the burden is quite low. In fact, this chart shows and amazing improvement. Total debt service as a percentage of income is now down to the levels not seen since the 1980s. This means if we can get through all this fiscal cliff and debt ceiling bullshit, we really could have a big expansion in the economy and a stock market boom.

42 comments:

Dan Lynch said...

Based on the "balance sheet recession" theory.

Meanwhile in Japan ...... private balance sheets have had decades to recover, yet their economy is stuck in a rut.

What if ..... an aging population that is approaching retirement and traumatized by economic uncertainty NEVER returns to pre-downturn spending habits ?

What if ..... deflationary expectations give people an incentive to save ? Or at least, the lack of inflation provides no incentive to spend ?

I'm beginning to question the "balance sheet recession" theory. Sure, unhealthy private balance sheets may have got us into this mess, but that does not mean that healthy private balance sheets will get us out of the mess. We have an aging population that has no confidence in the economy, and no confidence that they can rely on SS & Medicare. They may choose to "play it safe."

Dan Lynch said...

One other thought on the FRED chart is that like so many aggregate measures, it may be distorted by gains by the elites.

What if all the gains in household balance sheets have gone to the elites, while the lower classes are still hurting ?

I'd love to see the household balance sheets broken down by class.

Chewitup said...

With the threat of changes in Social Security and Medicare benefits, there will certainly be a greater propensity to save. But with more people working and spending, and savings accounts losing nominally to inflation, as low as it is, there should be money moving back into equities. And an increase in investment to follow. I can't imagine irrational exuberance though. The sell side bs doesn't fly anymore. But people should feel comfortable with ETFs when things pick up a bit, assuming this fiscal cliff noise is put to rest.

Bob said...

I would like to see the chart from 1945 until 1980.

Matt Franko said...

Even if it stays at these low levels of debt it still implies that households have more balances available for consumption vice debt service per dollar of household income... so the corporate sector has consumers that have increased ability to spend...

But the "debt" ceiling thing is still the wildcard at this point... without those huge deficit balances being made available by the govt, the HUGE source of NFAs which end up in corporate coffers as retained earnings is just not available to the system...

rsp

Matias Vernengo said...

Balance sheets are healthier, but if wages do not go up, or public investment increases, it's hard to see how we are going to get a healthy recovery. And both look like impossible right now.

Tom Hickey said...

if wages do not go up

Pressure on wages is downward with no relief in sight. Fiscal austerity is the dominant meme, threatening the safety net and crimping deficit expenditure.

Household formation is lagging, and student debt is exploding, servicing of which will take precedence for borrowers for many years to come. In fact, it's the new mortgage.

The major spending of the domestic economic is housing and housing related. Robert Shiller thinks that housing likely hasn't bottomed yet, and is almost certainly not about to rebound to previous levels anytime soon.

Without income growth, a return to previous levels of spending on housing is not possible without permanently low mortgage rates and lax lending standards, like low downpayment — the recipe for another bubble.

paul said...

From the looks of this, based on previous episodes of over-leveraging, we have a long way to go...the graph should be on the upswing...and it isn't yet.

https://www.dropbox.com/s/5de574ifo10j1aq/graph3.png

Matt Franko said...

Paul,

Looks like the pink line is gone back to trend and the green line is at all time lows...

I'm trying to get some data on the projected S&P earnings and compare that to projected deficits... this is the key data point...

imo, even if bank credit stays in the toilet, that doesnt mean that the non-financial sector still cant make good numbers next year and absorb most of the $NFAs as retained earnings next year and this will bring in the S&P numbers...

where else can the balances come from? If bank credit is flat? ie nowhere..

rsp,

Joe said...

What's the exact definition of "Disposable Income"?

Because wages have gone done since the GFC, so this should have decreased disposable income, thus skewing that chart some. Dean Baker constantly says that consumption is historically high, but if disposable income has gone down, then it takes a larger percentage of income just to get by, meaning you may be spending a larger share of disposable income while still consuming less. Exactly how disposable income is defined by the fed may help me clear this up.

Dan Lynch brings up a good point. I don't see how it invalidates the BSR theory though. Paradox of thrift effects will always apply, every surplus has to be matched by a deficit elsewhere in the system.

paul said...

Matt,

I just put the red (pink) line on this chart to show how financial business debt has grown in relation to household debt.

If you place the red graph over a graph of total non-financial business debt the chart looks pretty much the same.

Financial debt has risen out of proportion with growth of households and non-financial businesses, which is what we already suspected.

This just shows how bad the situation is…financial businesses just leverage wealth out of the greater economy towards the top, and it's killing everything else.

These bastards have to be stopped.

Matt Franko said...

Paul,

So what is that red line?

How much the corporate financial sector is in debt?

Current long term liabilities of the corporate financial sector?

rsp,

Mike Norman said...

What if ..... an aging population that is approaching retirement and traumatized by economic uncertainty NEVER returns to pre-downturn spending habits ?

Good point.

One other thought on the FRED chart is that like so many aggregate measures, it may be distorted by gains by the elites.

Another good point.

paul said...

"I'm trying to get some data on the projected S&P earnings and compare that to projected deficits" - Matt

In 2011 corporate profits (CP) increased by $32.1B compared to a deficit of $1475B…about 2.5% of the deficit went to profits.

Haven't looked to see what other sectors have increased if there is more…CP total is about $1.5 T.

Matt Franko said...

Would it not be true that as long as the govt lets the deficit do what it wants to do, ie provides NO fiscal drag...

The non-financial corporate sector can STILL do very well via sales to the household and govt sectors providing provision to those 2 sectors?

Paul: Those $1T+ deficits have to end up on some sector's balance sheets at the end of the year...

Even if bank credit remains flat...

rsp,

Matt Franko said...

does anybody know how to compute the total S&P 500 projected earnings from the per share data?

(If I could remember everything I once knew I might be pretty smart;)

rsp,

paul said...

"So what is that red line?"

The red line is financial business debt divided by NFA.

The green line is household debt divided by NFA.

Matt Franko said...

Paul that looks like just the increase... what was the total?

rsp

paul said...

"Paul that looks like just the increase... what was the total?" - Matt

To get the total, just multiply the factor on the left scale by NFA, or about $12T. Or, go here:

DODFS Debt Outstanding Domestic Financial Sectors (DODFS), Billions of Dollars, Annual, Seasonally Adjusted

TBSDODNS Debt Outstanding Domestic Nonfinancial Sectors - Total Business Sector (TBSDODNS), Billions of Dollars, Annual, Seasonally Adjusted

HSTCMDODNS Total Credit Market Debt Owed by Domestic Nonfinancial Sectors - Household Sector (HSTCMDODNS), Billions of Dollars, Annual, Not Seasonally Adjusted

Matt Franko said...

Just heard Norquist on CNBC.. his position (if he has influence) is that the debt ceiling will only be increased on a dollar for dollar basis with corresponding cuts in future budgeted expenditures.... NOT GOOD.

JK said...

"One other thought on the FRED chart is that like so many aggregate measures, it may be distorted by gains by the elites."

Is there any way to disaggregate the data?

paul said...

"Is there any way to disaggregate the data?" - JK

Take a look at PSAVE (Personal Savings)…It's at the $500B level thru 2011.

GPSAVE (Gross Private Savings) is around $2.8T.

Tom Hickey said...

Just heard Norquist on CNBC.. his position (if he has influence) is that the debt ceiling will only be increased on a dollar for dollar basis with corresponding cuts in future budgeted expenditures.... NOT GOOD.

The question is which congress critters are least secure and will flip under pressure. Otherwise, gridlock.

Tom Hickey said...

I would say that the rating agencies are probably correct if they decide to downgrade the US as a banana republic that is becoming a global wildcard.

Matt Franko said...

Tom,

The word is Boehner's job is in jeopardy so maybe that is part of this... ie B takes it to the wall in show of "toughness/resolve/etc.."

rsp,

JK said...

Paul,

I loaded both into FRED. Right where you said.

Can you elaborate on what each of those numbers are saying, Personal Savings and Gross Private Savings, in relation to the original posted graph Debt-to-Income…?

JK said...

Also, take a look at Total Savings Deposits at Depository Institutions. It seemed to be slowly rising from 1980 to 1995 (4 trillion to 10 trillion), but then an explosion from 1995 to present (10 trillion to about 65 trillion).

Is that the housing bubble? And is Total Savings Deposits = Outstanding Loans?

http://research.stlouisfed.org/fred2/graph/fredgraph.pdf?&chart_type=line&graph_id=&category_id=&recession_bars=On&width=630&height=378&bgcolor=%23b3cde7&graph_bgcolor=%23ffffff&txtcolor=%23000000&ts=8&preserve_ratio=true&fo=ve&id=SAVINGS&transformation=lin&scale=Left&range=Max&cosd=1980-11-03&coed=2012-12-17&line_color=%230000ff&link_values=&mark_type=NONE&mw=4&line_style=Solid&lw=1&vintage_date=2012-12-28&revision_date=2012-12-28&mma=0&nd=&ost=&oet=&fml=a&fq=Quarterly&fam=avg&fgst=lin

Matt Franko said...

JK,

"Loans create deposits"... rsp

Matt Franko said...

PS JK

I believe that is about 6.5T vice 65... rsp,

Total bank credit is only about 7T and has been for about 4 or 5 years... stuck there. ie "banks arent lending"

JK said...

Matt Franko,

Good catch on the numbers. So… there's only 6.5-7 trillion in outsanding bank loans (deposits).. in our entire banking system?

I thought the amount of 'spendable money' in circulation was mostly credit. But if total deposits are only 6-7 trillion, that's under half the the national debt.

I swear I've seen total oustanding credit in the economy to be around 60 trillion. Am I wrong on this?

JK said...

I'm really confused now about what that Total Savings Deposits "is" ….

Matt Franko said...

JK,

total net US wealth is up around that number I believe... (all asset classes)

Paul and I are looking at what looks like has been more or less loosely termed $NFA... USD Net Financial Assets...

(I dont care what orthodox "economists" look at or term things, these people are mostly these days all morons... read them at your own peril... the answers and true insights are going to come from outside the academe of economics from other disciplines for now until we can get some non-morons in there...)

US national "debt" is most of these $NFAs.

Check out the Feds Z.1 here:

http://federalreserve.gov/releases/z1/Current/z1.pdf

It has all of the totals of the asset classes that comprise $NFA, ie mostly non-govt USTs, bank deposits, FR Notes and coins in circulation... that's about it... Paul has this total...

rsp,



paul said...

"I thought the amount of 'spendable money' in circulation was mostly credit." - JK

JK, credit isn't "spendable money" unless one ignores the offsetting liability, which is basically "negative money". At least not in the mathematical sense. Whatever spending is enabled by credit is taken away down the road. In order to repay debt NFA must be expanded.

This is mainly because of saving and profit that can't be clawed back…so the debt can't be serviced in the aggregate…but also because of inefficiencies in the system…frictions…that keep funds from circulating perfectly to where they are needed. The funds needed to retire debt must come from net government spending, or the system will contract.

Spending created by credit without NFA creation would be the mathematical equivalent of a perpetual-motion machine.

Credit is not "money"…credit creates spending…money and spending are not the same thing.

Money is a stock, spending is a flow that never accumulates to a stock…GDP does not accumulate to a stock. Money flows from one account to another without changing the stock or level of funds.

This is the point where a lot of folks get confused by MMT…they seem to think that the economy creates money somehow as it grows. The economy cannot grow without growth in NFA.

I believe it is a serious misnomer to call credit "money", but that's the way it is and has been so I suppose we're stuck with it. The only real, persistent "money" in the economy is NFA.

The stock of NFA is accounted for on balance sheets in the aggregate and the only change that can occur is who's balance sheet the NFA is on unless the government does something to change it.

Credit is a "helper" system not a "driver" system.

Oh, and currently Total Debt Outstanding is ~$54T…don't know how that relates to deposits.

JK said...

Thanks for the responses.

Paul: "Whatever spending is enabled by credit is taken away down the road."

That seems to be true for any individual loan, but in the aggregate, isn't total credit continually expanding?

Also, I agree that private credit creation couldn't continue long with injection of NFA. It seems to me the weight of interest payments is too great without NFA injections, and so through the injection of NFAs, deficit spending, the always expanding credit creation is able to continue. Do you agree with this?

As a side hypothetical: do you think an economy could continue to grow without NFA injection… so long as it maintained a sufficiently large enough current account surplus?

JK said...

ugh! This sentence should read:

"Also, I agree that private credit creation couldn't continue long WITHOUT injection of NFAs"

paul said...

"in the aggregate, isn't total credit continually expanding?" - JK

Yes, it has been until recently. But consider this…

…expanding credit doesn't eliminate previous debt, it merely adds-to. The liabilities keep going up, and
so do the payments, which are a subtraction from future income. So Incomes have to go up at the same rate at least.

I'm ignoring interest, which makes the problem even worse.

So, future Income is effectively lowered by debt service…which lowers the ability of borrowers to incur more debt. Simple feedback loop.

Just because you have property (assets) worth $200,000 you can borrow against doesn't mean you can afford to make the payments…to do that you have to have income. Income is a function of NFA, not credit.

The level of debt is self-limiting, unless TPTB decide to lower underwriting standards and make loans to shaky borrowers, which they did.

Credit extended to creditworthy borrowers is part of the compact made between banks and the FRB system in order for them to hold a franchise to create dollars…banks must be able extinguish the liabilities it creates or it goes out of business (at least that's how it used to work).

A banks loss-ratio is something like 5%…I think we saw about 3 times that during the GFC.

Those that claim that credit drives the system and can bootstrap itself to grow the economy by constantly expanding debt have not closed the circuit that leads the real causation for the growth.

FD…my first career was as a real-estate appraiser working for a savings and loan…13 years. Don't ask, it's a boring story. I learned a lot about underwriting and who really has the risk position on loans, and also about construction as an inspector for draws which led to my second career…General Contractor for 18 years. After all that i finally worked as an engineer for an architectural business.

This thread has pointed to a treasure trove of possible data mining from FRED because if we relate the right series and analyze the patterns we can get tremendous insights into the moving parts of the machine.

This is what I've been working on since my sectoral balances article and I feel like a kid with a bunch of new toys. I have an article nearly ready on this subject but every time I get involved in a discussion like this new ideas pop into my head and I can't get the darn thing finished.

Here's another graphic I've put together that demonstrates several relationships at once…

http://dl.dropbox.com/u/33741/graph2.png

paul said...

"As a side hypothetical: do you think an economy could continue to grow without NFA injection… so long as it maintained a sufficiently large enough current account surplus?" - JK

Sure, but think about what is actually going on…the government is creating dollars…exchanging them for foreign currency…so the trading partner can buy our stuff.

This is NFA injection also.

How is this different than when the government net-spends? We get to hold foreign currency instead of them holding our currency. Numbers on a spreadsheet.

paul said...

"Paul: Those $1T+ deficits have to end up on some sector's balance sheets at the end of the year..." - Matt

Well, $500B of it ends up on foreign balance sheets.

Some of it funds savings growth.

Some of it funds profits, which haven't been that great lately.

A pretty big chunk of it disappears into the ether as debt is paid down…the prior gains have already been taken and most of it is with the top 0.1%. A huge wealth transfer.

Looks like NFA lags credit by about 4 years if you look at the chart I linked to a few comments above. Draw a horizontal line from any point on the debt series to the NFA series and measure it on the years scale.

This means NFA is monetizing debt that was incurred 4 years previously on average, or something like that. At least that's how I interpret it.

JK said...

Paul,

Can you link me to your sectoral balances article? Thanks.

paul said...

JK, here:

http://neweconomicperspectives.org/2012/10/sectoral-balances-within-the-domestic-non-government.html

The second graphic in the above article is not very convincing…my thinking has evolved somewhat since then and I think there are more convincing ways to make the case.

I'm about to put another one up based on what we have been discussing here this weekend if they want to post it and i will try to cross-post it here.

Matt Franko said...

P,

"something like 5%…I think we saw about 3 times that during the GFC."

that's what happens when you have the govt's DoD one year willing to pay $50/sheet for a piece of plywood and the next year not buying any...

The price of materials collapses and then you cant sell a previously financed home for as much as you financed it for as new home prices collapse with the price of the building materials... any new buyers can buy a new construction unit for much cheaper...

Its a moron-fest at our govt....

rsp

paul said...

"Its a moron-fest at our govt…."

Thet're all basically feeding at our trough…enriching themselves on the backs of the working man…and those that aren't allowed to work.