Consumer Debt Repayment: The Sign of a Lengthy Correction?

US stocks have been teetering on the top of a wall for weeks. Someone should give them a shove!

But yesterday, the Dow rose 103 points. Gold was up $2.

This leaves investors hoping, wondering, waiting for another day. “Maybe I can make some money in the stock market, after all,” say the mom & pop mutual fund buyers. “I gotta stay in this market; it’s going up,” say the pros.

And so it goes…

But the Great Correction continues. Here’s the latest from Bloomberg:

US Household Debt Shrank 1.5% in the Second Quarter

American households pared their debts last quarter, closing credit card accounts and taking out fewer mortgages as unemployment persisted near a 26-year high, a survey by the Federal Reserve Bank of New York showed.

Consumer indebtedness totaled $11.7 trillion at the end of June, a decline of 1.5 percent from the previous three months and down 6.5 percent from its peak in the third quarter of 2008, according to the New York Fed’s first quarterly report on household debt and credit.

The report reinforces forecasts for a slowing economy in the second half of 2010 as consumers hold back on spending and rebuild savings. The Fed last week said the recovery would be “more modest” than it had anticipated and announced it would keep its securities holdings at $2.05 trillion to prevent money from draining out of the financial system.

“Everybody understood coming into this recovery that the need for reduction in debt and deleveraging was going to be a pretty significant headwind,” said Stephen Stanley, chief economist at Pierpont Securities LLC in Stamford, Connecticut. “Households in particular continue to be much more conservative than in the recent past.”

The Fed last week said high unemployment, lower housing wealth and tight credit are restraining the household spending that makes up 70 percent of the world’s largest economy. Policy makers repeated a pledge to keep interest rates low for an “extended period” to keep the recovery going. The jobless rate stayed at 9.5 percent in July and has remained above 9 percent since May 2009.

Consumer debt increased dramatically in the Bubble Epoque. Paul Wright explains:

In 2005, America’s 164 million credit card holders charged $2 trillion to their credit cards – amounting to $12,500 per credit card holder. This contributed to massive consumer debt, which rose over seven times in 28 years – from $355 billion in 1980 to $2.6 trillion in 2008. By 2008, consumer debt increased seven times, while the savings rate was seven times lower than in 1980.

Now consumers are paying down their debt – or defaulting on it – at a rate of about 6% per year. We don’t know where this process will go, but if consumer debt is to be cut in half, it will take about 7-10 years, at this rate.

In the meantime, The New York Times calls America’s nationalized mortgage lenders, Fannie and Freddie, “zombies.” But it says they must be “tolerated for a while.”

The amount of mortgage payments in arrears is increasing.

And the Fed is back in the bond market buying federal government debt. It bought $2.55 billion worth of Treasury debt yesterday.

The moaning and whining…the bailouts and boondoggles…the crackpot solutions and ditzy diversions – everything is normal!

Bill Bonner
for The Daily Reckoning