By Eric Fry
12/09/09 Laguna Beach, California – “The great American consumer deleveraging continues,” our colleagues at The 5-Minute Forecast observed yesterday. “The Fed announced that consumer credit shrank for a record ninth month in a row in October.”
Consumer credit, as we all know, drives a big chunk of consumer spending, which drives a big chunk of the American economy. Ergo, no credit; no economy.
But consumers are not the only borrowers between the Atlantic and the Pacific who contribute to economic activity. Commercial and industrial (C&I) borrowers also play a large role. The dots are pretty easy to connect here: When C&I lending is growing, businesses are expanding. And that means rising profitability and employment. When C&I lending is falling, however, businesses are contracting.
This is the unfortunate condition that now prevails.
The combined total of C&I and consumer loans outstanding contracted by nearly $300 billion during the first nine months of this year. And this dismal trend shows absolutely no sign of reversing itself, as Douglas French, explains in his column, The Credit Crunch Continues.
Eric J. Fry, Agora Financial’s Editorial Director, has been a specialist in international equities for nearly two decades. He was a professional portfolio manager for more than 10 years, specializing in international investment strategies and short-selling. Following his successes in professional money management, Mr. Fry joined the Wall Street-based publishing operations of James Grant, editor of the prestigious Grant's Interest Rate Observer. Working alongside Grant, Mr. Fry produced Grant's International and Apogee Research — institutional research products dedicated to international investment opportunities and short selling. Mr. Fry subsequently joined Agora Inc., as Editorial Director. In this role, Mr. Fry directs and supervises the editorial and research processes of numerous investment letters and services. Mr. Fry also publishes investment insights and commentary under his own byline as Editor of The Daily Reckoning. Mr. Fry authored the first comprehensive guide to investing internationally with American Depository Receipts. His views and investment insights have appeared in numerous publications including Time, Barron's, Wall Street Journal, International Herald Tribune, Business Week, USA Today, Los Angeles Times and Money.
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Um, so how is it bad that credit is contracting? The original problem is that banks handed out credit like cheap candy. Makes sense to me that total outstanding credit should decrease even further–below Mar07 bubble-induced levels.
I guess it just means that the consumer is not going to be spending next year like everybody expects. That means lower tax revenue and more government spending and deficits an higher commodity prices.
6 months ago The Asia Times ran an article called “The end (or death) of debt Capitalism” Looks like it is true. Wall street keeps trying to get things back to where they were during the hay days of over consumption and speculation. Not going to work.
What is not reflected in this, is the amount of borrowing that individual states are being forced to contemplate to ensure they stay operating. This will have to be paid back eventually, and it will fall on the tax payer to do this. The consumer can not get credit, is also frightened to spend what little he has, and is being hot with increased charges. I wrote a piece recently regarding the proliferation of traffic cops in North Carolina. Everyone is relying on what they can squeeze out of Joe public, he doesn’t have anything left to give.