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US consumer credit continues to contract

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decline1(Sept. 9, 2009 - Thaler's Corner) This is one of those variables we have been monitoring closely in our efforts to evaluate the phase of the debt deflation process in which we find ourselves.

We only recently had disappointing news on this front from Europe (Thaler's Corner 01-09-09: It’s all a matter of credit) with the ECB’s estimate that loans to households had contracted 1.1% y-o-y in July, the steepest decline since the creation of the European Union.

 

Yesterday evening, the Fed released its latest available statistics (July 2009) concerning US consumer credit, which were surprisingly “weak”.

While the consensus was looking for a decline of $4bn, following the $10.3bn plunge in June, credit nose-dived by $21.6bn in July, while June’s decline was revised to–$15.5bn !

Non-revolving credit, which includes closed-end loans for big-ticket items like cars, boats, college education and holidays, plunged a record $15.4 billion, i.e. at a 11.7% annual rate.

A graph is worth more than a long explanation, so check out the change in the monthly changes in credit in both dollar and percentage terms on an annual basis.

The least we can say is that it looks like a huge unknown.

Consumer credit in the US in $bn

Hmm, doesn’t look like a green shoot to me……

TC_consum_credit

 

Percentage changes in US consumer credit on annual basis

The worst since…1944

TC_consum_credit_annual

 

The only silver lining we see in this cloud is that the last time credit collapsed so rudely was at the end of WWII, after which it surged 51% in 1946.

The situation today is (luckily) very different, and the current contraction is solely the consequence of the desire of both banks to reduce their leverage and consumers to cut their debt load, given prohibitive real interest rates and rising unemployment, the phenomenon identified by Mr Fisher in his time as: The Debt-Deflation Theory of Great Depressions .

This does not augur well for upcoming consumption figures in the United States…

Erwan Mahé

Asset allocation and option strategy

OTCex Group



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