Debt Shows First Drop as Slump Squeezes Consumers

At first glance, this seems like good news - Americans are actually reducing their debt. In a sane world with a sane monetary system – it would be. The problem – as we’ve discussed many times – is that debt creation is required in our current monetary system. We must continue to create debt each year equal to the aggregate rate of interest on all outstanding debts (as Chris mentions below) – or serious problems will begin rippling throughout the system – which we see happening everyday now. The debt required each year is now a very big number – and it’s getting bigger. So, when we see that debt is actually being reduced, it’s a very bad thing for a debt-based monetary system. This is the opposite of what we’d expect. We would like to think that paying off our debts would be a good thing – but it’s not a good thing in this system. The Federal Reserve obviously knows this – which is why we see them ‘injecting’ more and more money into the system by various means. Someone must pickup the slack in debt creation – it is required for the system to function.

This illustrates just how backwards our nation and the world has become. While God warns against becoming indebted to a lender, the world rewards us for taking on more debt. The reason? Because someday your debts are going to come due – and when you can’t pay – what you have will be taken from you – just as the Bible tells us. So, we are living in a monetary/economic system that rewards us for choosing the world’s ways over God’s ways – even though this will eventually lead to economic ruin. Surprised? You shouldn’t be. When we follow the world instead of God – this is the type of deception that we should expect.

Satan is the source of all deception and opposes God and His ways – on everything. Never forget – our spiritual enemy does not have a 75 year time horizon. He instituted systems within the world years ago that will allow him to gain worldwide control – over generations. How did he deceive us this long? We have focused on the here and now – on our wealth and power – and we have been blinded to the long term effects of what this will do to us. We have been tempted – and have given ourselves over to these temptations.

I have heard many Economists and ‘experts’ say that the current economic problems in the world today (U.S. negative account balance, world’s debt levels, etc.) cannot be sustained forever – and will need to be corrected at some point ‘in the future’. It’s much easier to push the hard choices into the future instead of seeking solutions today. We see this behavior inherent in our leaders – there has been no fiscal responsibility – and there still isn’t. In fact, it’s getting much worse with all of the ‘bailouts’ and ‘stimulus’ packages. Each generation has passed the problem on to the next – and as this problem has been passed – it has gotten worse with every subsequent generation. Now – our generation stands at the brink of the abyss. Now – our generation cannot simply pass along the problem because the system is collapsing. We – you and me – must now face the music for all of the sins of past generations.

We have been given the responsibility to find a way out of this mess. Can we do it alone? Can we take on the world and it’s deception by ourselves and somehow find a way to succeed against what appears to be insurmountable odds? We need to somehow find a monetary system that does not rely on exponential growth – that is stable and sustainable. At the same time, we must outsmart an evil spiritual being that will do everything possible to prevent our success. He will bring those he controls in the world against us at every turn. So, can we do all of this on our own? Not a chance. We only need to look at past generations and the decisions they have made to see the answer is no. Follow worldly intelligence and logic – and we will fail. I’m sure that there will seem to be many possible solutions – and all but one will lead to our destruction. There is only one way for us to succeed – God’s way.

jg – Dec 12, 2008
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Households pay down debts for first time

Thursday, December 11, 2008, 4:03 pm, by cmartenson
Chris Martenson

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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DECEMBER 12, 2008

Debt Shows First Drop as Slump Squeezes Consumers

By PHIL IZZO, BRENDA CRONIN and SUDEEP REDDY

Wall St. Journal

The U.S. economy is deteriorating more rapidly than expected just weeks ago, indicating the recession will be deeper and longer than feared as households and businesses struggle with the most stress they have faced in decades.

New Federal Reserve data revealed that U.S. households paid down debt for the first time since the central bank started collecting the information in 1952. While a positive longer-term trend, the higher savings rate means that consumers are spending less. That is a punishing turn for an economy in which consumer spending accounts for 70% of gross domestic product.

The Commerce Department said exports, which had helped sustain the economy through midyear, fell 2.2% in October from a month earlier as foreign demand for U.S. goods continued to fall. The nation's trade deficit rose in October to $57.2 billion from $56.6 billion in September, despite a considerable drop in oil prices during the month.

WSJ's Phil Izzo talks with Kelsey Hubbard about the results of the latest survey showing economists believe the current recession will last into June 2009, making it the longest since the Great Depression.

Another government report indicated that initial unemployment claims in the first week of December surged 58,000 from a week earlier to 573,000, a 26-year high, as companies slash payrolls before the end of the year. The number of workers continuing to collect jobless benefits jumped 338,000 to 4.43 million in the week ending Nov. 29 from the prior week -- matching the largest weekly increase on record, in November 1974 -- with little relief in sight as businesses brace for a lengthy downturn.

The government data spurred forecasters to update their expectations for the depth of the contraction, which is now expected to continue through the first half of next year. The increasingly grim news is likely to give a push to President-elect Barack Obama's plans for massive government spending to jolt the economy.

Citing the weak trade figures and other signs of a business slowdown, the forecasting firm Macroeconomic Advisers downgraded its estimate of GDP in the current quarter by a full percentage point on Thursday, to a 6.6% annualized decline. If that comes to pass, the quarter would rival the two worst periods in the recessions of the early 1980s. The economy declined by 7.8% in the second quarter of 1980 and 6.4% in the first quarter of 1982.

The final GDP number could turn out to be less dire, of course. Some economic consulting firms continue to estimate a slightly smaller 5% GDP decline this quarter followed by a 4% contraction in the first three months of next year.

Economists in the latest Wall Street Journal forecasting survey projected, on average, that the decline in GDP, which started in July, would continue through the first two quarters of 2009. If those predictions bear out, it would mark the first time GDP has contracted in four consecutive quarters during the postwar period.

On average, economists expect June 2009 to mark the end of the recession, which began in December 2007. That would put the downturn at 18 months, the longest period of decline since the Great Depression. The recessions of 1973-75 and 1981-82 each lasted 16 months.

The 54 economists in the latest Wall Street Journal survey predicted, on average, that GDP would contract at an annual rate of 4.3% in the fourth quarter of 2008, and 2.5% and 0.5% in the first two quarters of 2009. The Commerce Department's preliminary estimate showed a 0.5% decline in quarterly GDP for the third quarter of 2008. The economists were surveyed Dec. 5-8.
The expansion of the U.S. trade gap in October came as the plunging cost of oil imports was more than offset by a surge in the volume of oil that was imported. September's hurricanes, which disrupted activities at the port of Houston, partly caused the October import surge.

Exports of goods and services fell to $151.7 billion in October from $155.1 billion the prior month, as trading partners felt the effects of the worsening slowdown -- and a strengthening U.S. dollar. Total imports edged down to $208.9 billion from $211.6 billion, largely because of the drop in oil prices.

The broad-based decline in exports showed how a key engine of GDP growth earlier this year is sputtering. Trade represented as much as 2.9 percentage points of GDP growth in the second quarter, and 1.1 percentage points of growth in the third.

Through much of the first half of 2008, "the only thing that was keeping the economy from technically showing a reduction in GDP was trade," said IHS Global Insight economist Brian Bethune. "Even though we saw weak growth, it was strong enough to more or less keep factories busy and help absorb the shock of a weak domestic economy."

Now, "there's probably going to be little or no contribution from those exports," Mr. Bethune said.

The financial turmoil over the past year has taken a deep toll on consumers and businesses. The Federal Reserve said Thursday that U.S. household net worth fell 4.7% to $56.5 trillion in the third quarter, marking the fourth-straight quarterly decline, as home values, stocks and other assets lost value. Household net worth was down 11% from a year earlier.

The Fed's quarterly flow-of-funds report, the most comprehensive snapshot of the household sector available, showed that household debt contracted at a 0.8% rate, the first drop on record. Growth in consumer credit slowed to 1.2% at an annual rate in the July-September period, the Fed said, far lower than the 3.9% pace in the prior quarter. Borrowing for home mortgages fell at a 2.4% annual rate, the largest decline since the Fed began keeping the figure.

Consumers are being hit by falling home prices and job losses. The economists in the Journal survey on average said the unemployment rate will peak at 8.4% next year. While that rate was surpassed in both the 1970s and 1980s, it would mark a four-percentage-point increase from the low of 4.4% in March 2007. Only the 1973-75 recession, with a 4.1 percentage-point increase, had a larger jump in the postwar period.

Adding to consumers' pain: The end of the recession isn't likely to mark the end of job losses. In past recessions, labor-market contraction has continued for months after a downturn's official end. The economists surveyed, on average, forecast just an 8.1% rate for December 2009 as job cuts continue into 2010.

"The job market is ugly and is going to stay that way," said Allen Sinai at Decision Economics. "The economy is going through the heart of reductions in the work force now."

Many economists in the Wall Street Journal poll cited a major expected fiscal stimulus package as the key to pulling the U.S. out of recession, even though the structure of the package remains uncertain.

Write to Phil Izzo at philip.izzo@wsj.com, Brenda Cronin at brenda.cronin@wsj.com and Sudeep Reddy at sudeep.reddy@wsj.com

The Perils of Consumer Debt

I wrote in an earlier post on our monetary system (Part II) that debt levels are crushing the world’s economy - leading to deflationary pressures throughout the world. We’re seeing more and more articles like the one below that show how current household/corporate/government debt is approaching unmanageable levels. The same dynamic is at work here that is causing housing markets to collapse – debt levels are outpacing income around the world. As the ratio of total household debt to disposable income increases – consumers have less and less money to spend. This is causing the world’s economy to slow dramatically.

Let’s first take a look at household debts levels in the U.S. (South Korea household debt levels look very similar - graph shown in the article below).

It’s easy to see that our household debt to income ratio has grown exponentially over the past 30 years. This shouldn’t be surprising to us since our debt is growing exponentially – while our income is not. Let’s take a look at some information taken directly from the Fed. The following chart shows us our interest payments as a % of disposable income.

The chart above is showing us the percentage of our income required to meet our minimum debt payments (interest only). As you can see – since the early 1990’s – the minimum payment on our debt has risen steadily and now consumes over 14% of our income. Again – this is just to pay interest – this does not reflect payment of principal. If we add in principal – we see that Americans need almost $1 for every $5 earned to pay debt obligations.


Here’s the culprit (chart below). Household credit market debt outstanding has reached almost $15 trillion dollars in the U.S. What is happening today to the world’s economy is the result of some very simply math. We can only take on so much debt – before the amount of money required to service the debt – exceeds our ability to pay (income). If you are someone faced with paying the minimum on your credit card or buying groceries – what are you going to do? You’re going to buy groceries - of course. The same dynamic is playing out all over the world – current income cannot support existing debt plus living expenses (rent/mortgage, food, etc.) – so defaults are rising on credit cards, autos, mortgages, etc. People are prioritizing what they can afford – and buying additional ‘stuff’ is not high on the list – so the world’s economy is tanking. It doesn’t matter how much ‘liquidity’ is pumped into the world’s financial system – if consumers cannot take on any more debt – there is no lending. The other piece of the puzzle – as we’ve spent a great deal of time discussing in previous articles – is that debt growth isn’t simply good for the world’s economies – it’s required.



You’ll notice that household credit market debt outstanding seems to be leveling off on the chart above. You probably also noticed that the ratio of household debt service to income ratio (chart above) actually dropped last month. I posted an article a few weeks ago that explained how Americans actually reduced their outstanding debt in November – for the first time in our history. We are now beginning to realize that more debt is not good in this economic environment – and we see this phenomenon on these graphs. The graph below shows us the percentage change (Year/Year) of household credit market debt. As we’ve also discussed previously, consumer borrowing is falling off a cliff – and since exponential debt creation is required in this system – we’ve seen the Federal Reserve taking extraordinary actions to keep the system functioning.


This is not a problem isolated to the United States. Since every major economy is on the same system – we see that every nation is struggling with unmanageable debt loads.

External Debt (% of GDP)

The world doesn’t need more debt (as we’re constantly told by our leaders) – it needs a monetary system that is sustainable.

So, we are now in a situation where deflation (prices are dropping for everything) is rippling throughout the world’s economy due to crushing debt loads while the supply of money in the hands of consumers is also declining significantly. Since debt growth is slowing and debt equals money in our system– money supply growth is also slowing.


While the total supply of money continues to grow (albeit much slower over the past few months) – who is getting more of the money and who is getting less? Who is benefiting from the trillions in bailout money as the system collapses? The wealthy – bankers, Wall St., etc. Who continues to struggle under this system – you and me. Wealth is now being transferred from average people (that’s you and me again) to the rich at a dizzying pace.

It has always been this way – we just haven’t been paying attention. We live in a monetary system that allows (our Government allows this – which means you and I allow it) banks to create money and charge us interest on the money they create. Even though this fiat currency is inherently worthless, they continue to control more and more of the world’s assets through this system while you and I have less and less. I’ll say it again – this is not an accident.

Are the bailouts having any affect on the economy? Nope. Take a look at bank reserves at the Fed.


These excess reserves tell us that banks are not lending the money they are receiving – regardless of what we’re told through the media. This is due to the current state of the economy and the fact that the Fed is paying interest (.25%) on reserves.

How are credit markets? It appears that the Fed remains the lender of last resort.

Although we continue to hear lots of rhetoric about ‘reviving’ the economy - we are seeing economic conditions continue to deteriorate and we see the Fed and Treasury doing very little to help. The Fed lowered the Federal Funds Rate target to .25% yesterday – which simply matches the effective Federal Funds Rate – it’s actually been around .25% for months. Lots of talk – yet they are doing nothing to actually correct the situation. I don’t have to tell you again how this ends.

By the way – if you’ve heard the Fed talk about ‘Quantitative Easing’ and wondered what this means – it simply means that the Federal Reserve is planning to print vast amounts of dollars. If you’re thinking this could seriously devalue the dollar – you’re right.

jg – Dec 17, 2008
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DECEMBER 17, 2008

The Perils of Consumer Debt on Display in South Korea
By EVAN RAMSTAD

Wall St. Journal

SEOUL -- After the Asian financial crisis hit South Korea a decade ago, the government helped the export-dependent economy recover by pumping out money and convincing people to borrow and spend more.

But this time around, the high household debt that accumulated in the past decade is depressing spending -- an experience that has relevance around the world as governments seek ways to get consumers to help lift their economies.

A supermarket in Seoul, where debt is up and spending is down.
As exports drop and South Korea's economy slows, a high level of household debt is keeping consumers from spending more and the government -- like others elsewhere -- is wrestling with the question of how much to intervene.

South Korean lawmakers over the weekend approved a 2009 government budget that is 11.5% larger than this year's, at 284.5 trillion won ($208.65 billion). On Tuesday, the Ministry of Strategy and Finance unveiled a package of job programs and spending measures it calls the "South Korean New Deal."

The debate in South Korea is also colored by its unfinished rise from poverty, which began in the 1960s and proceeded strongly until the Asian crisis. In the aftermath, South Korean companies wiped out debt, built up cash and invested less in the economy, while the government eased consumer borrowing.

That led to a steep rise in consumer debt. Now, as the global slowdown erodes South Korea's ability to export goods, domestic consumption is too weak to drive economic activity the way it did in the late 1990s. The government expects private consumption to grow just 1% next year.
"Everybody is too much in debt, so they cannot consume," says Kim Kyeong-won, a senior vice president at Samsung Economic Research Institute.

According to data released by the Bank of Korea last week, South Korean household debt climbed 10.7% in the third quarter from the same period a year ago to a high of 676 trillion won. That amounts to 40 million won, or $29,300, per household.

South Korean government and banking officials acknowledge household debt levels are high but note that delinquency rates are low, and that falling interest rates are easing some of the pain. The central bank has lowered its main rate to 3% from 5.25% over the past two months.
Meanwhile, tight restrictions on mortgages -- consumers can only borrow up to 60% of the value of their property -- should insulate banks if defaults rise or property values fall.

The government's policies for 2009 are based on an expectation of 3% economic growth next year, said Noh Dae-lae, a deputy finance minister. That's higher than the Bank of Korea's forecast of 2%. Some private economists predict a contraction for the first time since 1998.

The consumer-debt problem is entering the debate over whether the South Korean government is too involved in the economy. President Lee Myung-bak campaigned last year on a platform of scaling back government involvement, including cutting regulation and privatizing some government companies. The prospect that Mr. Lee will instead preside over more intervention is widely debated in the parliament and media.

In South Korea's crisis a decade ago, the government propped up failing businesses and banks, and it remains a big shareholder of some of those firms today. And as consumer debt grew over the past five years, several new government programs emerged to help people avoid bankruptcy, which carries a social stigma.

At a credit-counseling center that is part of one such program, Yoon Sook-hyeon recently appealed for a new repayment schedule after an illness kept her from making six months of payments on a $27,000 debt-workout program she started three years ago. Ms. Yoon, a divorced mother of four, ran up the debt when she started putting expenses from her family business, a small motel in Seoul, on personal credit cards.

"When I started using a credit card, it was just for living costs, education fees and clothes for the kids," Ms. Yoon says. "When the business got worse, it was hard to pay the bills so I got cash from credit cards. Then it got more difficult, so I had to use several cards together. Later, I couldn't even do it." A credit counselor listened to her story for about 30 minutes and agreed to extend her program.

Jung Sook-cha and her husband have run up nearly $70,000 in education-related loans, which allowed one of their children to study overseas. She said she's worried her husband, who works at a bank, may be forced to take a pay cut in the slowing economy, hurting their ability to maintain loan payments of $1,000 a month.

—SungHa Park contributed to this article.
Write to Evan Ramstad at mailto:evan.ramstad@wsj.comm

Consumer Credit Collapsing - September 2009

As I said in a previous post – in a sane world with a sane monetary system – consumer debt reduction would be a good thing. Unfortunately, we live within an insane monetary system where our money is created from debt. Our debt must continue to grow exponentially for the system to function. Couple this with the fact that 70% of our economy is driven by consumer spending (which is rapidly declining) – and we’ve got a perfect storm for a debt based monetary system.

We are experiencing the collapse of exponential growth curves (debt, money supply). Things will really begin to deteriorate when we see a major shock to the system – most likely a stock market crash. When this happens, what little confidence that remains in the system – will vanish. Then the entire system will begin a ‘free-fall’ collapse – stocks & bonds will continue to rapidly decline in value, interest rates will increase significantly, the value of the U.S. dollar will plummet, derivatives will become worthless, bank failures will increase dramatically possibly leading to a bank holiday, etc.

We hear our financial (Federal Reserve and economists) and political leaders tell us that our economy is ‘stabilizing’ and that we will return to ‘growth’. What is the truth? The truth is that for our economy to return to ‘growth’ – we will need to once again create approximately $4 trillion in debt each year (current aggregate amount of interest on our outstanding debt). Currently, we are no where near this amount – and with our current levels of debt – there’s no way that I can see for us to return to this level of debt creation.

Remember – even if we could create $4 trillion in debt over the next year - our debt must grow exponentially. For our economy to continue to grow and prevent a collapse – debt creation in coming years will need to continue to grow - $5 trillion, $6 trillion, $7 trillion. You see the problem. The current government stimulus packages are only prolonging the inevitable collapse of this system. Our government can continue to implement new stimulus packages – but eventually we all go bankrupt – including our government.

We have reached the end of the line. We’ve been climbing the steep incline of an exponential curve – and now we’re falling. There is no way for us to return to ‘growth’ unless this system changes. Of course, world leaders have a new system waiting for us. Once we begin a ‘free-fall’ collapse – we’ll see the ‘solution’ quickly appear.

jg – September 8, 2009
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From Nathan’s Economic Edge (www.economicedge.com):

Tuesday, September 8, 2009

Consumer Credit Deflating…

While the whole world of “economic experts” are talking about and bracing for inflation, consumer credit (credit being the largest part of the money supply) is CONTRACTING at a RECORD PACE.

That’s what exponential curves do when they have peaked. The math does not allow anything to grow unabated year after year into infinity, that only occurs in the minds of idiot politicians and poorly trained economists who received their education in the land of fiat – America.

Here’s the data according to Econoday... the experts consensus was for a contraction of $4.1 billion, actual contraction was $21.6 billion for July:

Highlights


Contraction in consumer credit reflects rising consumer caution as well as banking efforts to limit lending exposure. Consumer credit contracted $21.6 billion in July, a very severe reading and the largest on record. At $15.5 billion, June's contraction was also severe ($10.3 billion initially reported). July's contraction is the sixth in a row for the longest streak since the credit squeeze of 1991. Nonrevolving credit led the decline, at minus $15.4 billion in a surprise given cash-for-clunkers which kicked off late that month. It would be a big surprise if there was another deep contraction in non-revolving during August. Revolving credit in July fell $6.1 billion. The markets may ignore this report but policy makers won't as it works directly against their efforts to stimulate spending.

So, even with Cash for Clunkers the contraction was the largest on record! What will it be without?

I’ve been warning that we are on the verge of a deflationary spiral, the data keeps coming in to support that view. Below are the latest graphs from the St. Louis Fed. Year over Year numbers below zero mean the supply of credit is shrinking:

Total loans and leases at commercial banks – negative yoy, the most since 1976:

Total Revolving credit outstanding – negative yoy, the most ever recorded by the modern Fed:

Total Nonrevolving credit outstanding – negative yoy, the most since the early 90’s, I’m sure it would far surpass that if not for government loan programs provided by the likes of FNM, FRE, and the FHA:

Total consumer credit is contracting, and the rate of contraction is accelerating:

As far as derivatives of consumer debt… Securitized total consumer loans are falling at nearly a 10% pace year over year:

Sure the government is going to create inflation, right up to the point that all confidence in our currency is lost. Today they auctioned off tens of billions more in public debt. The supposed bid to covers were high, but they were FAKE BIDS made by the Primary Dealers who are buying up the debt and then selling it right back to Uncle Sugar. The game is not enough, the money they create cannot go into the economy because the economy is saturated with debt and all new money simply goes to pay it down. It’s a game that is going to end in tears, and already has for millions of unemployed and their families.

Today’s action took the dollar’s daily chart right to the bottom of a descending wedge formation:

If that normally bullish formation breaks down, it’s likely to be violent and you can see that the next support can be found all the way back down in the 71 area on the weekly chart:

U.S. Credit Shrinks at Great Depression Rate

It’s rare to see a mainstream article that correctly makes the connection between debt, our money supply and income. All of which are now rapidly contracting.

Those that do make the connection – inherently ask the same question.

From the article below:

“It is unclear why the US Federal Reserve has allowed this to occur.”

Indeed. Why would the Federal Reserve allow this to happen? The problem is that you will not find the answer by looking through normal channels – the Fed itself, mainstream media, most economists, etc.

The truth is that the Federal Reserve not only allowed this to occur – it caused it to occur.

As I’ve said many times before – answer the question as to why the Fed would cause this – and you’ll find just how deep the rabbit hole goes.

jg – September 16, 2009
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U.S. credit shrinks at Great Depression rate prompting fears of double-dip recession

Telegraph.co.uk

By Ambrose Evans-Pritchard, International Business Editor

Published: 11:59PM BST 14 Sep 2009

Both bank credit and the M3 money supply in the United States have been contracting at rates comparable to the onset of the Great Depression since early summer, raising fears of a double-dip recession in 2010 and a slide into debt-deflation.

Professor Tim Congdon from International Monetary Research said US bank loans have fallen at an annual pace of almost 14pc in the three months to August (from $7,147bn to $6,886bn).

"There has been nothing like this in the USA since the 1930s," he said. "The rapid destruction of money balances is madness."

The M3 "broad" money supply, watched as an early warning signal for the economy a year or so later, has been falling at a 5pc annual rate.

Similar concerns have been raised by David Rosenberg, chief strategist at Gluskin Sheff, who said that over the four weeks up to August 24, bank credit shrank at an "epic" 9pc annual pace, the M2 money supply shrank at 12.2pc and M1 shrank at 6.5pc.

"For the first time in the post-WW2 [Second World War] era, we have deflation in credit, wages and rents and, from our lens, this is a toxic brew," he said.

It is unclear why the US Federal Reserve has allowed this to occur.

Chairman Ben Bernanke is an expert on the "credit channel" causes of depressions and has given eloquent speeches about the risks of deflation in the past.

He is not a monetary economist, however, and there are indications that the Fed has had to pare back its policy of quantitative easing (buying bonds) in order to reassure China and other foreign creditors that the US is not trying to devalue its debts by stealth monetisation.

Mr Congdon said a key reason for credit contraction is pressure on banks to raise their capital ratios. While this is well-advised in boom times, it makes matters worse in a downturn.

"The current drive to make banks less leveraged and safer is having the perverse consequence of destroying money balances," he said. "It strengthens the deflationary forces in the world economy. That increases the risks of a double-dip recession in 2010."

Referring to the debt-purge policy of US Treasury Secretary Andrew Mellon in the early 1930s, he added: "The pressure on banks to de-risk and to de-leverage is the modern version of liquidationism: it is potentially just as dangerous."

US banks are cutting lending by around 1pc a month. A similar process is occurring in the eurozone, where private sector credit has been contracting and M3 has been flat for almost a year.

Mr Congdon said IMF chief Dominique Strauss-Kahn is wrong to argue that the history of financial crises shows that "speedy recovery" depends on "cleansing banks' balance sheets of toxic assets". "The message of all financial crises is that policy-makers' priority must be to stop the quantity of money falling and, ideally, to get it rising again," he said.

He predicted that the Federal Reserve and other central banks will be forced to engage in outright monetisation of government debt by next year, whatever they say now.

Consumer Spending Tumbles

We’re hearing a lot of people today tell us that the ‘great recession’ is either over – or will be ending soon. We’re hearing this from political leaders, financial leaders and economists. Many of these people are now pointing to the 3rd quarter increase in GDP (3.5%) released yesterday. As we discussed in yesterday’s post – no one should be celebrating this gain in GDP.

The problem – as we’ve seen time and again – is that very few people are analyzing the details behind the 3.5% gain - and are therefore blindly following the blind.

What is the real economy? Does the GDP number really give us a good indication of what is going on? I believe the answer is no. The real economy to ordinary people (that’s you and me) is employment, consumer & business spending, wages/income & our purchasing power (U.S. Dollar). I don’t know about you – but if I’m out of a job – I could care less what the government says about GDP (whether the actual number is accurate or not). If I don’t have a job – I’m not spending – I’m just trying to survive.

This is what 26 million of us are now doing – just trying to survive.

Because real unemployment is somewhere between 16-22% (depending on how you measure) – it should not surprise anyone that consumer spending is declining.

From the Wall St. Journal:

Spending Tumbles

Spending by Americans took a big tumble in September, as they lost a popular government subsidy and were left with a lousy job market and a credit crunch.

The 0.5% drop in spending was the largest since December 2008, when the recession was at its worst. Most of the drop was in durable goods, which include autos. Outlays on nondurable goods and services posted a gain from last month.

We’ve seen massive amounts of ‘stimulus’ money flowing into our financial system – but little of this is making its way to ordinary Americans. Since our monetary system is based on debt – let’s look at what banks are doing with their reserves.

Are they lending? No. Why? As I’ve said before – banks do not want to lend in this economic environment and as our economy continues to lose jobs – there will be fewer and fewer people and businesses who can qualify for loans.

Since we now know that bank loans directly contribute to our money supply – we would expect our money supply growth to slow considerably based on the charts above – and that’s exactly what we’re seeing.

Personal income is also flat or down.

With nearly 10% of the U.S. labor force out of work, incomes aren't going up much. September's flat reading followed a 0.1% August gain, revised from an originally reported 0.2% increase.

So – in the real economy where you and I get the money we need to survive – life is not good and the trends are not good. All of the people out there saying that the recession is ending are living in a fantasy land of government statistics and wishful ‘outlooks’.

For you and me – economic conditions continue to decline. As you’ve seen me say before – we’re rapidly approaching a cliff – and we’re going to be pushed off at some point.

Get ready for significant stock market declines in the near future. Economic fundamentals do not support current stock prices. When everyone wakes up to this economic reality – life in the stock market is going to be chaotic.

I have posted another good blog post by Karl Denninger below relating to the consumer spending report – followed by the Wall St. Journal article mentioned above.

jg – October 30, 2009
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Friday, October 30. 2009

Posted by Karl Denninger in Macro Economics at 09:05

Another Bad Economic Report (PCI/Spend)

http://market-ticker.denninger.net/archives/1557-Another-Bad-Economic-Report-PCISpend.html

How do you get "economic recovery" out of these numbers?

Personal income decreased $0.1 billion, or less than 0.1 percent, and disposable personal income (DPI) decreased $0.2 billion, or less than 0.1 percent, in September, according to the Bureau of Economic Analysis. Personal consumption expenditures (PCE) decreased $47.2 billion, or 0.5 percent.

That looks like flat income and down spending to me.

Oh wait - we have to read past the first two sentences, right?

Let's do that.

Private wage and salary disbursements decreased $11.2 billion in September, in contrast to an increase of $10.1 billion in August. Goods-producing industries' payrolls decreased $7.8 billion, compared with a decrease of $6.3 billion; manufacturing payrolls decreased $1.5 billion, compared with a decrease of $4.1 billion. Services-producing industries' payrolls decreased $3.4 billion, in contrast to an increase of $16.4 billion.

Wait a minute. I thought that income was flat? We have a decrease, a decrease, a decrease and a decrease. How do we get to flat with those?

Supplements to wages and salaries increased $0.1 billion in September, compared with an increase of $2.0 billion in August.


Proprietors' income increased $0.7 billion in September, compared with an increase of $3.4 billion in August. Farm proprietors' income decreased $1.6 billion, compared with a decrease of $1.2 billion. Nonfarm proprietors' income increased $2.3 billion, compared with an increase of $4.6 billion.


Rental income of persons increased $5.4 billion in September, compared with an increase of $5.2 billion in August. Personal income receipts on assets (personal interest income plus personal dividend income) decreased $13.8 billion, the same decrease as in August. Personal current transfer receipts increased $17.3 billion in September, compared with an increase of $9.6 billion in August.

Ah.

Small business income was down compared to August, rental incomes were basically flat (compared to prior month), but income receipts on assets (dividends + interest on assets) decreased. Those are bad comps too.

The big Kahuna was government handouts, which was up big m/o/m. There's the entry that kept PCI and DPI from collapsing.

Real PCE -- PCE adjusted to remove price changes -- decreased 0.6 percent in September, in contrast to an increase of 1.0 percent in August.

Consumers are not spending.

All in all, another bad report. Not a disaster, but certainly not the stuff of which "economic recovery" is made.

The evidence continues to pile up......

_____________________________________
OCTOBER 30, 2009, 8:58 A.M. ET

Consumer Spending Tumbles

Wall St. Journal

by JEFF BATER

Spending by Americans took a big tumble in September, as they lost a popular government subsidy and were left with a lousy job market and a credit crunch.

The 0.5% drop in spending was the largest since December 2008, when the recession was at its worst. Most of the drop was in durable goods, which include autos. Outlays on nondurable goods and services posted a gain from last month. Spending rose 1.4% in August, revised up from a previously estimated 1.3% increase. That gain was driven by "cash for clunkers," which let motorists swap gas guzzlers for newer models. The car-rebate program started in July and ended in late August.

The subsidy helped push the economy to what the government reported this week was a 3.5% increase during the third quarter, seen as an end to the recession. But the recovery is expected to be slow, and questions abound to its sustainability once government stimuli fade. Another popular incentive, the first-time homebuyer tax credit, lapses in November, although the housing industry is trying to push an extension through Congress.

Commerce Department data Friday showed personal income flat compared to August while spending last month decreased by 0.5%. A key gauge of prices reiterated inflation wasn't an immediate threat, as the economy fights to recover.

Economists surveyed by Dow Jones Newswires had forecast income held steady during September and spending fell 0.5%.

With nearly 10% of the U.S. labor force out of work, incomes aren't going up much. September's flat reading followed a 0.1% August gain, revised from an originally reported 0.2% increase.

Personal saving as a percentage of disposable personal income was 3.3%, compared to 2.8% in August.

As for price gauges in Friday's report, the price index for personal consumption expenditures excluding food and energy, year over year, rose 1.3%. The year-over-year gain in August was also 1.3%. The Federal Reserve watches this core PCE index closely for signs of inflation pressures. Fed officials define their statutory goal of price stability as inflation of 1.5% to 2%.

On a monthly basis, the core PCE increased 0.1% in September compared to August. It has climbed at that rate five months in a row.

The PCE price index rose 0.1% in September compared to August. It rose 0.3% in August. Year over year, the PCE price index was down 0.5% in September. It fell at the same rate in August.

Write to Jeff Bater at jeff.bater@dowjones.com