Consumers still have a lot of wood to chop

October 7, 2009

What with unemployment climbing, housing as well as equities still well below their peaks and general anxiety about when the economy is going to rebound, it’s good news that consumers are cutting back on credit after binging for years. But Josh Shapiro, economist at MFR Inc, is not impressed.

Since the peak in July 2008, consumer credit outstanding has fallen by $119 billion as households struggle to get their balance sheets in order after asset prices melted down. To put matters into perspective, the Federal Reserve reports that as of the end of Q2, the value of household net worth had plunged by $11 trillion from its peak in Q3 2007 (a staggering sum, equal to almost 80% of nominal GDP). So, while representing a good start, the deleveraging that the household sector has accomplished to date is just that, a start.

You can see the Fed’s data here.

2 comments

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All of the practical aspects of altering spending habits and government intervention seem to bring change so slowly. As a whole health coach, I see people dealing with the here and now emotional impact of the economy, with shame and blame being most prevalent.

I look forward to our economic recovery and appreciate everyone who brings solutions to the table, whether they are economic, emotional or spiritual. For those struggling emotionally, I offer a complimentary eBook at http://www.LemonadeNetwork.com

Danny Fitzpatrick
Danny@LemonadeNetwork.com
Co-Author of “Emotional Stimulus Package: Your Guide to Re-creating the American Dream”

I agree absolutely with Danny Fitzpatrick when he says that government intervention “seems to bring change so slowly”. It has always struck me that governments HAVE tools at their disposal to bring quicker change which they NEVER USE !!

To illustrate, Warren Mosler has been advocating an abolition of payroll taxes since the credit crunch began (see http://www.ritholtz.com/blog/2009/10/pay roll-tax-holiday/ ). I don’t agree with everything Warren Mosler says, but at least he is imagineative. His blog is here: http://www.moslereconomics.com/

Payroll tax alterations would be one measure that would have an instantaneous effect on paycheques and household incomes. Another “instantaneous adjuster” available in the UK is to alter National Insurance contributions.

Instead of using these “instantaneous adjusters” governments use a collection of antiquated “levers” like interest rates and money supply changes, and no one really knows what the effects of these are!!! Its PATHETIC !!!!!

I make a few suggestions as to how to control demand a bit better here: http://ralphanomics.blogspot.com/2009/10  /stabilising-aggregate-demand.html I think I’ll make some more suggestions in the near future.