American Economy: Rebuilding a House of Cards

February 9, 2012

For decades, since our trade deficit began eating away at our economy, the slow erosion in Americans’ purchasing power has been masked by building a mountain of debt – both at the federal and individual levels.  It was a house of cards, doomed to collapse, as it did in the fall of 2008, plunging us into the worst recession since the Great Depression. 

But, beginning in the fall of last year, an economic rebound began to take shape.  Had the economy been fundamentally reformed?  Was the president’s emphasis on manufacturing and exports beginning to take root?  Were incomes beginning to rise, rebuilding Americans’ balance sheets?  Sadly, no.  The house of cards is simply being rebuilt.

A couple of days ago, the Federal Reserve released its monthly report of consumer credit.  From this report, it’s no mystery what lies behind the sudden change in the economy.  Americans have fallen back into bad habits, perhaps lured by record-low interest rates.  The following chart, taken from the Federal Reserve’s web site, shows the monthly percentage change in total consumer credit through December:  Percent change in total consumer credit.  In November of 2009, total consumer credit fell at the fastest rate since May of 1980.  It began to pick up but, once again, in August of 2011, perhaps in reaction to the near-default of the U.S., fell to nearly as low a level.  Since then, it’s recovered dramatically.  Note the last four data points on the chart.  In November, the gain in total consumer credit was the largest since November of 2001.  In December, it was only slightly off that pace.

The Federal Reserve breaks that down into both revolving and non-revolving credit, revolving credit being credit card debt and non-revolving credit being loans for autos, boats, mobile homes, etc.  It seems that the decline in credit card debt has come to a halt and non-revolving credit is climbing again at a pre-recession pace.  Here’s a chart of these two types of credit:  Revolving vs non-revolving credit

With the government’s encouragement for banks to boost lending and for consumers to resume borrowing, Americans are falling back into some very bad habits.  With real unemployment somewhere in the range of 20%, Americans’ capacity for servicing debt isn’t nearly what it was a few years ago, before the recession, when unemployment was about a third of that level.  It’s not likely that this new house of cards will last long.