Daily Archives: September 21, 2012

Flash Point: Neat or on the Rocks?

We’ve commented before on “coin” issues. By this we aren’t referring particularly to monetary issues but to issues that in some sense are binary – issues that have two sides. A simple example is the much discussed hypothetical sale of US Treasury debt by the Chinese. Selling is a binary event. As we have pointed out, if China sells someone else buys. The debt remains ‘owned’.

We have been aware of news that arctic sea ice is at the lowest ever recorded. Firstly we would point out that reliable data only extends back to 1979 and the beginning of satellite measurement. This is an infinitesimal span of time in climate terms. But secondly, sea ice appears to be somewhat binary as this article suggests: Antarctic Ice Area Sets Another [maximum] Record – NSIDC Is Silent. Sea ice is a complicated area of climate science that we do not wish to get into, but because reporting of climate issues is so politically motivated and one-sided, we present some evidence to keep the discussion two-sided.

Flash Point: How Is the American Consumer Doing?

We received a link to a special report at Comstock Partners: The Deleveraging of the Two Most Outrageous Financial Manias in History. This prompted us to take another look at consumer debt. In Figure 1, we plotted (blue line) total household credit market debt (CMDEBT) – total household mortgage debt (HHMSDODNS) as a percentage of disposable income (TDSP). This represents all non-mortgage debt including credit card debt, student loans and other personal and car loans. It has tripled since 1980. Over the same period, however, the debt servicing cost as a percentage of disposable income has remained roughly constant in the 11-14% range (red line). This is thanks to the fall in interest rates shown in this picture by the Effective Fed Funds Rate (EFFR green line) as a proxy.

Figure 1. Household non-mortgage credit market debt and debt service cost as a percent of disposable income shown with the EFFR. (Click on image to open in a new window)

We suggest that with interest rates near their lower bounds, the consumer cannot take on more debt and maintain a constant level of debt service payment, something that he seems predisposed to maintain at this level.

The figure in the Comstock report, Household Debt Percent Of GDP, shows that the total household credit market debt is decreasing but this as we see above is entirely due to the decline in mortgage debt. The upturn in non-mortgage debt is troubling. We do not see that the consumer will be in a position to raise GDP significantly any time soon.

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