Consumer's Revolt, Shun the Chains of Debt

Brian Hicks

Updated November 10, 2010


As I discussed in this article, you can lead a horse to water but you can’t make him drink.

That’s where the ultimate sticking point is for the Fed — especially in an economy where consumption is 70% of GDP.

Because while the Fed can force money into the system in exchange for government bonds, they can’t necessarily make the money circulate to create new goods or more importantly, new jobs.

In short, that leaves the Fed essentially “pushing on a string” while commodity prices rise across the board.

Meanwhile, consumers are refusing to go along with the Fed’s ongoing effort to hook them on even more heroin…

From Bloomberg by Caroline Salas entitled: U.S. Household Debt Shrank 0.9% in Third Quarter, Fed says.

U.S. households cut their debt last quarter, borrowing less against homes and closing credit card accounts, according to a survey by the Federal Reserve Bank of New York.

Consumer indebtedness totaled $11.6 trillion at the end of September, down $110 billion, or 0.9 percent from the end of June, according to the New York Fed’s quarterly report on household debt and credit. Households have slashed about $1 trillion from outstanding consumer debts since the peak in the third quarter of 2008, the New York Fed said.

U.S. households, facing a jobless rate that’s persisted near a 26-year high, have slashed debt and increased savings following the worst financial crisis since the Great Depression. That’s pared consumer spending and slowed the economic recovery, helping to prompt the Fed’s decision last week to start another round of unconventional monetary stimulus.

Consumer debt is declining but only part of the reduction is attributable to defaults or charge-offs,” Donghoon Lee, a senior economist at the New York Fed, said in a statement. “Americans are borrowing less and paying off more debt than in the recent past. This change, which we continue to study carefully, can be a result of both tightening credit standards and voluntary changes in saving behavior.”

Individuals paying off their debt crimped their cash flow by about $150 billion in 2009, the New York Fed said. Between 2000 and 2007 borrowing increased consumers’ cash flow by $300 billion a year, according to the district bank.”

Needless to say, the borrow and consume model is has seen better days.

Phony is as phony does.

Related Articles:

Hoenig: QE2 May Lead to “future instability”

Agflation is Here: Hate to Say I told you So…

Hoenig: QE2 Won’t Work

Jim Grant on the Fed’s “Mission Creep”

Jim Grant: “The Fed is out of its lane” 

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