From Weight Loss to Debt Loss

Growth requires finance. Capital needs to be raised and allocated. Then, earnings must be distributed and invested. And, of course, consumers want credit too.

One sector that is growing particularly fast in the emerging markets is…you guessed it…finance. You could say that the thing that emerging markets most lack is a sophisticated financial industry. Until they get that, they’ll have to continue to earn their livings with honest work. When people in Argentina buy houses, for example, they typically have to come up with a lot of cash…sometimes 100% cash. This means that they tend to have a lot in savings. It also means that there is a huge business waiting to be developed – helping the consumer get deeper into debt.

Stocks in the US went up 65 points on the Dow on Friday. Gold continued its correction, down $6.

We got a big dose of American culture this weekend. We went Christmas shopping in the Annapolis Mall. It is the first time we’ve been in a mall for at least 15 years.

We’ve never seen so much junk in one place! Geegaws…gadgets…shoes…clothes… It is amazing what people will buy. Anyhow, while we were strolling through the mall, looking for presents for Elizabeth and the children, an idea occurred to us…about what this mall represented. Was it not a consequence of a 50-year trend towards consumerism? Was it not aided and abetted by artificial policies of the Fed and Keynesian economic delusions? Is it not unsustainable economically…financially…and physically? Could the Chinese, the Indians, the Russians, the Brazilians and the Indonesians…or all 9 billion people expected on the planet in 2050…ever hope to consume resources in such a manner? Americans can only do so because of the willingness of the foreigners to ship their resources…and their finished products…to the US in return for pieces of paper with the dollar signs on them. What will happen when the foreigners want to consume their own output? Will there be enough? Or will a new idea emerge with the new economies…a new idea about how to live…and what it means to be wealthy?

Maybe the ancients were right about it. A man’s wealth can be measured by what he has; but it can also be measured by what he doesn’t have and doesn’t want. When he wants little, he is a rich man.

But in the Annapolis Mall we saw no sign of Marcus Aurelius. This was a temple of the hedonists, not the ascetics. People were there to buy things…things they didn’t need and would be better off without, in our opinion. But were they buying with money they didn’t have? Maybe not. Consumer debt is going down. That must mean they are borrowing less than they are paying back.

Well, not exactly. Debt is going down largely because households are defaulting. Floyd Norris reports in The New York Times:

“Figures released this week by the Federal Reserve showed that Americans owed $10.8 trillion on home mortgages at the end of the third quarter, down 2.2 percent from a year earlier and the lowest level since mid-2007.

“Similarly, the Fed said that outstanding credit card bills in October totaled $888 billion, down 8.5 percent from a year earlier. That number was the lowest since March 2007.

“Those trends do not, however, necessarily indicate that Americans have paid down their debts and are starting to lead the more frugal lives that some financial planners have been recommending for years. There has undoubtedly been some of that, but the declines also indicate that banks have been forced to write off a lot of bad debts and have grown more stingy in granting credit.

“…banks’ credit card write-offs have soared, to an annual rate of 10.2 percent in the third quarter of this year.

“And the Mortgage Bankers Association reported that at the end of the third quarter, 4.5 percent of all mortgages were in foreclosure – one in 22 mortgages. It said another 6.1 percent – one in 16 – were at least two months overdue. Those figures are for all mortgages, not just subprime ones.

“The extent to which Americans are really cutting back may become clearer this holiday shopping season, when they decide how much money to spend. If what they tell pollsters can be trusted, they are going to cut back.

“A poll of 7,500 Americans in November, conducted for Alix Partners, a business consulting firm, found that people expected to save 15 percent of their income when the recession ended. That is about three times the current savings rate, as reflected in government figures. Asked what their largest personal financial concern was, 18 percent cited lowering their debt, more than any other choice.”

We sat in the business class lounge at Dulles Airport longer than we wanted to. The TV in the corner seemed to be tuned into a talk show. As near as we could figure, people yelled at each other about things that didn’t concern any of them. Two subjects of conversation were addressed. The first was the case of a teenage girl who had murdered a child. The second was Tiger Woods’ private life.

More interesting were the advertisements. There must have been four different advertisers offering to help people get out of debt. In the past, the ads would have been for weight-loss programs. Now, they are debt-loss programs.

Until tomorrow,

Bill Bonner
The Daily Reckoning