Don't Expect that Consumer to Save you

We've noted many times on The Economic Populist how the continual focus of the United States citizenry as simply a bunch of consumers is just plain wrong. We hear cries 70% of the economy is based on consumerism, how this creates demand and so on....

But here's the real situation. The consumer is plain tapped out.

debt to income

In a Merrill Lynch report, covered by this LA Times blog, (I cannot find the original report), we see some very damning income to debt ratios of America's middle class.

Remember, these numbers are from 2007, so lord only knows, with people trying to live off of credit cards due to job loss, what the ratio is today.

Lower-income families account for 40% of the population but just 12% of total consumption, BofA Merrill estimates. The middle class is 50% of the population and nearly as large a share of consumption, at 46%.

That leaves the wealthy to account for a hefty 42% of consumption.

In terms of their debt burdens, neither lower-income families nor the wealthy are constrained the way the middle class is constrained, the report asserts.

It estimates that middle-class families’ debt as a percentage of disposable income was 205% in 2007, a function of the level of trading-up during the housing boom and of the cash people pulled from their houses via home-equity loans.

By contrast, lower-income families’ debt-to-disposable-income ratio was a much less onerous 133%. And for the wealthy the percentage was lower still, at 116%.

Thus, the need to pare debt is most urgent now for middle-income earners.

Consumer confidence has retreated, retail sales are flat or dropped, wealth inequality is at record highs and we have a coming tsunami foreclosure wave, with just today it was reported a record 13.2% of all mortgages are in foreclosure or delinquent in Q2.

We also had in increase of at least 12.7% more people now in poverty and those figures are from 2008.

Merrill Lynch also reports most people put their wealth into home equity, which has evaporated.

The Baseline Scenario is wondering about further wealth inequality in all of this:

There are a lot of moving parts going on with the interaction between the top percents and the middle class, inequality and collapse, but it isn’t hard to see a story where the stock market picks up, housing is in decline for a decade, and we have a jobless recovery. I’m not sure how that would effect our quantitative measures of inequality, like the gini coefficient, but we could end up with much more inequality, and inequality that stings a lot harder than it did during the boom times.

BS (clever huh!) also notes Wall Street and the super rich will probably recover just fine....but the middle class? Strongly looks like the U.S. middle class will all just be left behind.

In my view, this is the entire problem with focusing in on the United States middle class as consumers, otherwise known as how to suck up every single dime out of their pockets....instead of producers. Here is this workforce, with the most hard working people in the world, dedicated ethic, highly skilled and educated....and instead of focusing in on giving them stable increased income and job security, i.e. a production economy, the attention is whether or not you can get them to go shoppin' and increase their credit limit on a deck of credit cards.

What a waste! Imagine what could happen, what kind of real growth the U.S. economy could have....if only we had policies focused on the U.S. middle class as the ultimate workforce, something to be encouraged, promoted, incentivized and utilized.

Update:

After I posted this, some other sites came to my attention, who are also writing on the same topic.

European Tribune which has quite a number of graphs in one post (whereas in this article you must click on the links to see graphs per topic).

Naked Capitalism is also focused on income, but from a more macro economic theoretical view point.

More detailed graphs and analysis at Zero Hedge where they conclude the consumer (middle class) will be the cause of the next financial crisis. Zero Hedge has the main reports as attachments to their post.

I recommend reading all (in addition to this post and original links/references of course!).

What can I say. Great minds think alike (sic).

Meta: 

Comments

The original report is a report that you have to pay for

I think. I strongly encourage people to read the LA Times story because the author raises a very important policy question.

RebelCapitalist.com - Financial Information for the Rest of Us.

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probably true

and I didn't go digging around into an online database with subscriptions yet...we can get this information from other sources.

Merrill does have a global wealth report online, for public viewing, free. There it also shows how the financial crisis was not only 10 years in the making, but also fueled by increased leverage of the middle class (debt).

Read both posts linked have a depth of info, the LA Times story as well as Baseline Scenarios additions. Baseline Scenario also reviews a large report done by Zero hedge.

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Great Minds think alike (sic) - NC post

I just posted this and looked over at the title RSS feed to find this post on NC .

I just scanned it and the approach is different, describing various macro economic theory as being all wrong....

but the focus is almost identical to my post....it's all because the middle class, i.e. the consumer is getting royally screwed here and the focus should be on income.

Maybe everyone will scream in unison, it's about income people! Focus on policies to increase median income, generate high paying jobs!

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Over at Eurotrib

Melanchthon has a diary with a lot of great graphs that I think are from the same report about consumer de-leveraging. I think that this one is my favorite.

The geek in me thinks that superimposing a simple linear fit on this misstates the real phenomenon. It's exponential growth which means 1.2.4.16.256.etc......

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graphs, resources, data

I updated this post and put links, recommended reads to both EuroTribune and Naked Capitalism. It's also synchronous that the blogs all at once are writing on this, all from different perspectives.

I want to comment on raw data, graphs, analysis, from first principles.

If someone can or I can write up a forum post for the admin section on all of the raw data sites to obtain graphs, raw data and probably also all of the tools on EP in addition to methods to easily make graphs for posting on EP.

I think this would be very useful for writers. Kind of a "fast graph" for bloggers resource guide. Where exactly is all of the raw data, all of the sites, which sites have which EIs and so on.

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Hmmm

If someone can or I can write up a forum post for the admin section on all of the raw data sites to obtain graphs, raw data and probably also all of the tools on EP in addition to methods to easily make graphs for posting on EP.

A good magician does not reveal his tricks. Then again, we're interested in economic facts here.

I suppose that I could do some write ups on where I get unemployment numbers from......

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LOL

it still takes a lot of time to understand what the graphs mean, if making your own, how to do them, which data to include, etc.

More just a list of resources....writers still have to do their homework...

hey, our productivity would increase. ;)

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I had this very same argument yesterday

Bonddad and the radio host were touting how Cash For Clunkers being the catalyst that would save the auto industry. The former highlighting how auto companies were re-hiring. The problem is, they were re-hired to meet the demand on oversold cars, that is the dealers managed to make deals for cars that weren't on their lots. But all of it was fueled by a government program with a finite lifespan.

My argument was, what happens afterwards? We can't keep the C4C program on indefinitely, that would be fiscally stupid. Most of the cars that were sold, 8 out of 10 in fact, were Japanese cars, including the still-mainly-made-in-Japan Prius. The consumer has no credit, and what cash they got coming in, they're saving or paying off what they can to avoid further destitute.

We are mainly a service economy, and a huge chunk of that is hourly paid workers, who (not to make this even more complex) a sizable chunk are minimum waged. Businesses are seeing lower costs, but they're also having to lower prices on goods and services sold to businesses. One need only look at today's PPI numbers. If you read all the earnings statements, what has been the prime mover of keeping companies healthy? Cost cuts and reduction of inventories, because top line growth is not organically growing. Regarding inventories, unless it's discounted and it isn't something with inelastic demand, it's not moving.

This gets us back to our worker. If the above isn't happening, then the cuts will. Please tell me, outside of being irrisponsible, would banks lend money out to consumers? Major purchases are financed. Banks cannot be bastards with credit now, so they will be more restrictive. Secondly, many don't want to go hat in hand to Uncle Sam, especially with Obama in the White House, if their consumer loan portfolio gets sour on them to that critical point.

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bonddad needs to expand his reading

beyond Barron's and Bloomberg. Well JV, EP is here to write a different perspective.

There is no doubt from the industrial production graphs that cash for clunkers had a serious impact, but once that program ends....what happens next is a very good question!

Then, on home purchases, there is another one, something like a 8k first time homebuyer tax credit and a host of incentives. What happens with those run out?

I don't know about you, but I'm getting kind of sick of these gimmicks to give little boosts to EIs and GDP...
all the while the big issues, i.e trade, China currency manipulation, offshore outsourcing, repressed wages, corporate tax structure, the giving of large government contracts to outsourcers....good god this list goes on and on and on....these major structural problems which many can be addressed through legislation...

are being ignored! Jesus, we just had "almost" Financial Economic Armageddon (supposedly) and where is all of the Financial regulatory reforms that were so touted by so many experts?

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"debt"?

Quick question:

I am unclear on how the term "debt" is defined. If someone has $10,000 in a savings account and a $10,000 credit card balance, is his debt (as the term is used in your graph) $10,000 or zero?

miasmo.com

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income is incoming money

so interest on savings is income. If it is savings, the yearly balance, that is an asset.

In the graph you see the debt to income as well as debt to asset ratio.

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Let me rephrase my question.

In the calculation of the debt in the debt to income ratio, is the debt considered your total debt obligations minus your assets, or is it just the debt regardless of assets? It seems to me that someone who has a million dollars in the bank and a $1000 credit card balance is not really "in debt."

It seems that if the "debt" is the debt in excess of assets, the situation described by the graph is much more dire.

miasmo.com

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ratio means fraction means percentage

Firstly in the graph it is disposable income, that is money available after taxes....what your "net is" after the "government take".

Secondly, ratio means fraction.

In in other words, let's say Mary had $20k in debt and $10k yearly money after all of the taxes were taken out.

So, her debt to income ratio would be $20k/$10k = 2

that means Mary's debt to income ratio is 2:1 (two to one) or 200%. (2x100 to get percentages).

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Right...

but that is not the part I am confused on. If Mary has a $20k credit card balance and $5k in her savings account, is she considered to have $20k of debt or $15k of debt?

miasmo.com

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there are two data lines in the graph

one you see the income to debt, the other is asset to debt.

It's a ratio, the absolute numbers do not change, so regardless of each ratio, Mary always has $20k worth of debt.

It's like a corporate balance sheet, let's say some corporation made $5B in gross profits and had $3B in expenses. Their net is still $2B but that doesn't change the absolute numbers in the first two figures.

Or say you are in your kitchen. You have a pint of ice cream, you have half of a pie. Now the ratio of ice cream to pie is 2:3. or 66% or 2/3.

But that ratio does not change the fact you have a pint of ice cream and half a pie.

Just because a corporation has net profits of $2B does not change the fact they had $5B in gross profits and $3B in expenses.

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Why?

The notion that an economy built on debt-fueled consumption rather than production would eventually unravel seems like a no-brainer. The obvious question is "Why?" Why have our wise rulers done nothing to steer the ship in a different direction? Are they simply idiots? Or are they just sociopaths who are grabbing all they can while the ship goes down and fuck everybody else because they have luxurious gold plated lifeboats for themselves?

miasmo.com

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Because they are married to a flawed ideology and model.

Neo-liberalism and neo-liberal economic growth model. This model is working for very high income people - financial oligarchy and rest of the corp. and political elite. Eventually, it will trickle down - right?

RebelCapitalist.com - Financial Information for the Rest of Us.

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idiots

I would consider your description to fall under my first option - they're basically idiots. It's just that the idiocy is convenient to their consciences.

miasmo.com

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Broken record but ...

More evidence of flawed neo-liberal economic growth model. Asset price inflation and more debt replaced wage growth. ESPECIALLY FOR THE MIDDLE CLASS.

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it's really useful to watch the global finance media stream

which goes on CNBC/Bloomberg while America sleeps.

They are all excited about the potential for "growth" from China....but they caution on how they must get Americans "consuming again".

It's unreal, the focus, including U.S. policy makers is all about us buying crap from overseas....

We're not here to help the Chinese economy...or is that how they look at us?

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Oh, but we are a global economy

that is interdependent - yada yada bullshit. Financial oligarchy wants China to grow so that we can re-inflate the bubble. The model is so desperate for cheap imports - got keep costs way down because wages are not going anywhere.

But I don't know how reliable the economic numbers are out of China. It sounds like they may be on the verge of a huge bubble themselves.

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