You may be aware that Obama signed into law a credit card reform bill. The banks have since started raising the minimum payments and fees and cut credit limits.

It will take a while for that to work itself into the economy. Lower credit limits means that consumer will spend less and will be forced to pay a bigger minimum payment.

The data in the USA is as confusing as Australia’s has become–but in the opposite direction.

I use the the US Federal Reserve’s Flow of Funds data, which includes both level and rate of change tables. The level data is showing just the small dip you specify–but the rate of change data shows the huge drop in my charts.

The growth data is stored in the file gtab2d.prn, and the respective figures from there for the last quarter are:

Total Debt = +1,367,900
Household = -151,810
Mortgage = -5,220
Business Total = -28,280
Corporate = 140,620
State Govt = 108,410
Federal Govt = 1,439,570
Financial Sector = -1,791,750
Total Private = -1,971,840

On the other hand, as you note, the level tables indicate that private debt has fallen only marginally.

And on the other Aussie hand, the reverse pattern is true in the Australian data. The RBA noted that there had been a 0.1% increase in private credit in the last month, while the aggregate private debt level was shown to have fallen by +40 billion last month!

There is an explanation in the RBA Notes that this was due to a reclassification, but …

Anyway, I deliberately refrained from making any comment on the Australian data because of this disparity, while the automatic sums in my database produced the aggregate change in debt data from the USA’s growth figures. As a sole operator, I haven’t had the time to go and check this out–if I had the staff of a statistical agency or Treasury to help me, it would have been a task delegated to them immediately.

In the Australian data, while the last month’s figure is a wild card, the rate of deleveraging seems to be running at about 4% p.a. from the previous months’ data, which corresponds to the rate achieved during the 1890s Depression. This is equivalent this year to a 6% deduction from aggregate demand–since debt is roughly 1 2/3rds times GDP.

On the “in case you’re still reading” front, I am flat chat with a new subject (Behavioural Finance) on top of everything else I’m trying to do, so I don’t have the time to write as much as before, or to read posts as deeply. But my mornings start with reading the posts here as best as I can, and I must say that I’m still impressed with the standard of discussion.

According to federal reserve’s own statistics of consumer credit (the G.19 report). We have only
seen a SMALL drop in consumer debt.

http://www.federalreserve.gov/releases/g19/current/

Q3 2009 was the peak at 2.582 trillion. It has
since dropped to 2.519. It’s a drop but a small
drop.

I don’t see how you’re getting these charts
showing huge deleveraging. That’s not what
the federal reserve data shows.

At the rate we’re going, it will be a very
very SLOW deleveraging process.

What’s occurring in the US at the moment is a growing human disaster. Those belonging to the hungry and unemployed are those who have little to no power and as such, are unlikely to be a threat to power. The US probably has the worst social welfare state in the West – this barely helps the disadvantaged during the good times, let alone the bad.

The capitalist class war that the rich has been fighting successfully against the middle and working class in the US over the decades has ensured that the rich can dismiss the needs of the disadvantaged with impunity. In fact, as your friendly neoclassical economist will say, labour market interventions such as social welfare causes further unemployment, so the poor are better off being stripped of all help altogether – for their own good.

The one thing I don’t understand is, what is stopping Bernanke from simply going out and buying stuff with fiat? However much debt there is, it can be made small with a Fed purchase of enough size.

Of course, there will be hardship involved in getting that debt to a manageable size. But also opportunity for some.

Actually, I am sympathetic to this view because I think it is ridiculous this obsession with the “worth” of one’s home – we don’t need to constantly validate our decisions on furniture and cutlery and who knows what else we buy, so why your home?

I think Shiller is spot on about so much – and I think he’s spot on about increasingly middle class westerners wrapping their self esteem in price movements of their assets.

What a shame, because if people were not so pre-occupied with the price of their homes, then perhaps policy could more easily move away from supporting bubble prices (for the benefit of the middle class, and supposedly the economy) towards helping the more marginalised people who have been hurt so much by the house price bubble (and consequent rental affordability crisis) in this day and age where politicians have stopped leading and are rather lead by opinion polls.

Having said that, I can understand somebody taking a decision to go underweight residential property (that’s essentially what anybody who sells or has the finance to buy but does not is doing) – that’s pretty much what I am doing.

In my view, especially at a time like now, there is a very significant difference between being able to comfortably meet all living costs (including mortgage repayments) and having all other non-superannuation equity in a home, and being able to meet all living costs (including rent) and having significant resources which are liquid and immediately at your disposal.

Nobody here needs reminding of the risks that our economy confronts. And even if the tentative positive signs turned out to be sustainable – which I consider unlikely (the China situation is very interesting!) – we have been bombarded with messages that we confront the most serious economic problems in almost a century!

As they say, a recession is when you know somebody who loses a job, depression is when you lose yours (perhaps all of them, seeing as many families are depending on several incomes to meet their living costs). So that comfortably meeting of living costs could change quickly. And having liquid assets allows greater flexibility in response to difficult situations.

With regard to rental demand, it’s worth keeping in mind that even if many sell and begin renting, that home has not been destroyed – it’s just a reshuffling of the deck chairs (either another owner occupier moves out of the rental market, or an investor buys and adds it to the rental property supply).

This is worth remembering in some of the agent comments published of late about the loosening rental market supposedly due to boosted FHBs moving out of the rental market. That can only be a factor if they are moving into properties that were already built but unoccupied – because building data has been weak until now -which is likely. But it also will be due to people moving back in with family as they become unemployed or underemployed. Either way, there’s no positive in it for the realestate industry.

The stats I find to be the most important is the property price index created by Nigel Stapledon. Like the US, Australia has experienced an unprecedented increase in property prices, starting from 1987 and then rapidly increasing since 1996 (the same time as the US).

The bubble peaked in March 2008 and has been deflating as a national average since then. The health of the banking and financial industry are predicated upon property prices stabilizing or even increasing further. Steve has made a prediction of a fall of 40% in property prices. I think that it is likely to fall even more in the most bubble-inflated areas.

Unemployment, falling consumption, paying down debt, property price deflation and falling prices will feed into each other and lead to a damned lot of misery as seen in the US.

I don’t think that the economic disaster will occur until property prices start to deflate rapidly. Until then, this recession seems to be fairly mild on the surface.