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Wednesday, October 06, 2010

"Credit for the Recovery"

Daniel Gross:

Credit for the Recovery, by Daniel Gross, Commentary, NY Times: Every time the United States suffers a recession, trendspotters hasten to identify signs of frugality, extol the rediscovery of thrift and find evidence that Americans are finally (finally!) kicking their demon debt habit. ... Americans, we are told, have rediscovered their inner skinflint. Indeed, the savings rate, which fell into negative territory in 2005 at the height of the boom, bounced back strongly. ...
In fact, though,... some measures of consumer debt are starting to rise again and the easy-money, no-money-down culture still prevails in crucial sectors.
Oh, and a look at the data suggests that the decline in personal debt is driven less by Americans giving up on credit cards than on credit card issuers giving up on Americans.
CardHub.com, a credit-card industry site, crunched data ... and found that ... from January 2009 through June 2010, American lenders simply wrote off $124.1 billion in credit card balances as uncollectable. That accounts for nearly the entire $134 billion decline in revolving credit balances outstanding in the same period. ... A similar dynamic may be taking place in the much larger housing-debt market. Mortgage debt has fallen for nine straight quarters... But ... most of this decline can likely be ascribed to lenders writing off ... loans...
Meanwhile, as the economy slowly recovers, there are signs that Americans are rediscovering their free-spending ways. Total consumer credit ... has stabilized, and it rose in both June and July. It’s back to where it was in the second quarter of 2009. Collectively, we don’t seem to have run our credit cards through shredders. ...
And, believe it or not, that’s a good thing. The economic expansion ... was initially powered by government stimulus and business investment. But for this recovery to mature, broaden and persist, the greatest economic force known to mankind — the American consumer — has to get back in the game. ...
John Maynard Keynes wrote of the paradox of thrift — if everyone saves, everyone becomes poorer, because demand for goods and services will fall. Here’s another paradox: Running up consumer debt may be a moral failure and a recipe for long-term damnation, but it also contains the roots of our short-term salvation.

If the change in credit is decomposed into voluntary changes and involuntary changes, I wonder how the proportions have changed over time, especially recently? (By involuntary credit, I means changes driven by unexpected events, or forced by changes in economic circumstances, e.g. a car breaks down and there's no choice but to use a credit card to get it fixed, a recession hits causing a household member losing their job, and credit is used to fill the gap when money runs short each month, etc. I mostly have in mind the changes forced by the recession.)

There's also a question about the desirability of returning to a consumer debt fueled economy, and there's a question about the direction of causation as well. Does credit cause the expansion in GDP, or does the expansion cause the increase in the use of (voluntary) credit? I'm not sure what the data say on the causality question. Anyone know?

    Posted by on Wednesday, October 6, 2010 at 01:59 AM in Economics, Financial System | Permalink  Comments (22)


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