Deflationary Consumer Debt Phenomenon
Consumers are still pushing the panic button on the amount of debt they’re willing to take on, a sure sign that the economy has yet to recover. At an annual rate of 8.5%, it is now evident that debt is the new pandemic to be shed, however it creates some huge microeconomic consequences.
November Numbers
Consumer debt dipped $17.49 billion in November to $2.46 trillion, recording the tenth straight monthly drop due to tightening budgets and continuing defaults. With so much debt being shed so fast, it is clear this isn’t the result of consumers just making minimum payments. Instead, they’re really pushing to shed the weight of debt off their shoulders, all the while preparing for a healthier economic outlook.
Non-Revolving Still Falling
Non-revolving debt, primarily products such as personal loans, student loans and car debt, fell 2.9% on the month to $1.59 trillion, reflecting a weakening automotive industry and little incentive to borrow. Also important is the total amount shed in one month, 2.9%, which is significantly higher than most minimum payments, especially considering higher rates of interest on these loans. The plunge is either the result of greater efforts to pay down debt or more bankruptcies.
The Micro-economic Outlook
Plunging debt has two implications on the greater economic outlook. First and foremost, it shrinks the available credit supply to the general public, creating a temporary deflationary environment as credit is sponged from the system. In the long term, however, it provides for greater economic growth as capital accrues in the banking system for future lending. All in all, the trend proves to be healthy, despite short term weakness in consumer spending, the reigning champion of the consumer economy. Whether this trend will hold is of much importance, considering the next debt totals will include the busy holiday shopping season. If consumers can continue to cut back during the holidays, it sets a precedent of savings throughout 2010. If not, we may be on the verge of a consumer (not capital) led recovery.
