The first chart shows the TCMD as a percentage of GDP and also the annual percentage changes in TCMD with recession bars shown. It appears that when the annual change in credit rolls over, perhaps a debt/credit saturation point, the economy goes into recession. This is hardly an original idea.
The second chart highlights the exceptions when the annual change in credit rolled over but did not manifest in an official recession. The exceptions were all relatively minor dips and most did not dip into negative territory. In other words, credit was still growing, just at a slower pace. The 1960s dips did enter negative territory but no recession was called. The 1987 event coincided with a massive stock market crash.
The 2008 financial crisis coincided with debt saturation and the steepest plunge in percentage terms for the change in credit seen since at least 1952. It was nearly a 10 full percentage point drop. Also, the change in credit is still negative. People are still de-levering. Myself included. It is hard to quantify how pervasive this change in attitudes is.
I have completely changed my attitude toward banks and debt. It's not like I had a lot of debt to begin with, but now I am anti-debt other than the very few times it can be used productively. In my opinion, the Fed is encouraging credit destruction by squashing rates to 0%. This reduces interest rates across the curve and on interest bearing accounts. It was 0% interest rates that made me pay off my car loan. Where else could I get an immediate guaranteed 3% return?
The change in credit growth, the shear amount of debt to GDP (still around 350%), and perhaps permanent change in attitudes leads me to believe the recovery will be very slow and take a long time.
"It was 0% interest rates that made me pay off my car loan. Where else could I get an immediate guaranteed 3% return?"
ReplyDeleteExcellent logic.
I have the same thought process about taking out a loan on my home. It is paid for. I can get a loan with a very low interest rate.
What could I *safely* do with the money though? My online savings account pays just 1%.
In order to make it work, I'd have to take on more risk and chase yields just like everyone else. I have absolutely no interest in doing that.
Mark,
ReplyDeleteIf you and I are thinking this way, how may other people are thinking this way and reducing their use of credit and/or actively destroying credit?
Probably an unintended consequence of ZIRP. Maybe long years of ZIRP have conditioned the Japanese people the same way. That policy didn't work out so well for them.
"Probably an unintended consequence of ZIRP."
ReplyDeleteIt doesn't end there either. Here's another unintended consequence.
I can't make money off of my money as well as I could in the past. That means I MUST reduce my spending if I intend my nest egg to last the same amount of time.
Regardless of my level of overall bearishness (which is high), my spending habits have gone down simply due to the math.
Actually what happens with extremely low interest rates is that people will tend to borrow to the hilt and invest it all in the stock market, since it tends to give 6-8% annual yields.
ReplyDeleteRed Scourge,
ReplyDeleteI don't know any retail investors that max out their brokerage margin accounts because of low interest rates. Maybe hedge funds do. The S&P 500 has returned around 5% total (not counting dividends) over the last 5 years, or about a 1% average annual yield. 2012 was a good year for stocks, maybe 2013 will also be a good year.