s it me, or is the economic news sounding a lot better lately? Unemployment has dropped to 8.5%, certainly not a good number but a significant improvement compared to prior months. Better still, Christmas retail sales were surprisingly robust, and after-Christmas retail sales were up 5.3% versus the same week in 2010. There was even some good news in the housing market, and although the foreclosures just keep on coming, at least some people are starting to tentatively feel a bottom in the squishy swamp of real estate prices. I was beginning to wonder where Santa got all that cash this year, and then the Fed answered the question: consumer credit increased at an astonishing 10% annual rate in the month of November 2011! So all that cash wasn’t really cash at all—it was credit.
Theoretically, in a consumer-driven economy (which is what we call an economy that no longer has a manufacturing base) this is good news. Yet, somehow, after reading the consumer credit report from the Fed, I started to have a general feeling of uneasiness—akin to what you feel after eating a piece of sushi that just doesn’t taste quite right—and that feeling evoked a very specific memory.
In the fall of 2008, there was a period of more than a few days when consumer loans of any description were virtually impossible to find. Buying a car, getting a new credit card or expanding your credit line, or getting a mortgage—all of which were once simple tasks—became unattainable dreams. In short, credit stopped, and so did the economy. Worse than that, headlines and news commentators communicated 24/7 the sudden weakness of our major financial institutions such as CitiBank and Lehman Brothers. Stock market prices collapsed, and commodity prices (with the exception of gold) dropped perilously.
There was a general malaise that permeated the atmosphere of the first world particularly in New York and London. Savvy professionals were themselves uncertain of the near-term future. Comparisons to 1929 and 1930 abounded and the word “depression” was used not only by psychotherapists. Perhaps most significantly for the great body of American consumers, banks started failing, money market assets—which generally were thought, incorrectly, to be the same as bank deposits—lost value, and the disease seemed to jump from industry to industry with no warning and little logic.
For all of the genuinely complex aspects of the modern financial system, understanding what happened is not so difficult. The principal cause of the crisis and indeed of the severe recession that followed it was just too much borrowing, against real estate of suddenly questionable value, and on cars that might’ve been too expensive in terms of the borrower’s income, and of course on credit cards, at rates that often approached 30% per annum. Indeed, statistics kept at Columbia University by Prof. David Beim show that, expressed as a percentage of gross domestic product (GDP), household debt—the sum of credit card debt, car loans, mortgages, etc.—grew steadily throughout the last two decades and reached 100% of GDP in 2007. The last time it reached 100% of GDP was 1929.
That Fed report this week calculated that revolving debt (consisting mostly of credit card debt) increased by an annual rate of 8 1/2% last November, and non-revolving debt increased at 10 3/4% during the same period. Non-revolving debt is usually secured by an asset such as a piece of real estate, or a car, or a large purchase, such as a major appliance, purchased from a retail store. The breakdown between the two categories tells me that people were not just spending money during the holiday season on stocking stuffers; they were making major purchases, perhaps indicative of greater optimism about the direction of the economy. Indeed, the Consumer Confidence Index has also upticked a bit in recent months.
Ultimately, that’s what it’s all about: Confidence. Right now, the world is still a dangerous place. Slippery economic slopes in Europe, a stock market that demonstrated great volatility but ended up more or less flat for the year, unrest in the Middle East and on Wall Street, depressed housing prices and a huge number of foreclosures, and ever-growing federal debt—these all need to be overlooked or at least minimized if you really believe that 2012 will be a good year. Everyone knows that panic is contagious, but perhaps so is confidence, and no matter how long the catalog of ills may be, as I sit here writing this I discover that I’m confident in the future myself. I believe that this time, the expansion of credit usage at the end of 2011 was done by responsible borrowers who can afford to repay. I guess we all needed that good Christmas.
Someone whose birthday we celebrate this month quite famously once said “I have a dream,” envisioning America as a better place in the years to come, in terms of racial equality. Americans in general always “have a dream” of a better life and a better future in terms of material prosperity. That dream became a nightmare in 2008; let’s hope it’s not recurring.
Image: Iman Mosaad, via Flickr.com