An upside of crisis can be the inevitable deep analyses that tend to follow. And the recent financial turmoil is no exception -- likely keeping the world's economists at near full employment. An adjunct phenomenon resulting from this process is that many of us have become Monday morning macroeconomic quarterbacks, playing with a minefield of data. In reporting on Federal Reserve figures released yesterday, this morning's WSJ has offered up a trove of new data and interpretation that would have seemed preposterous -- and may still be -- just a short time ago.
At the forefront of this release is that "Total U.S. household debt, including mortgages and credit card balances, fell 1.7% in 2009 to $13.5 trillion ... -- the first annual drop since records began in 1945 ... reflect[ing] the extent to which job losses and a moribund housing market are forcing people to default on mortgages and other obligations, a painful process that has slammed millions of families and hit banks and investors with hundreds of billions of dollars in losses." And to wit "U.S. households saved 4.1% of their disposable income in the fourth quarter of 2009, up from 1.2% in early 2008. Consumer spending grew at an annualized, inflation-adjusted rate of 1.7% in the last quarter of 2009, up from a drop of 3.5% in the deepest part of the recession but still well below the long-term average growth of 2.6%."
According to The Journal, these "defaults are leaving many people with more cash to spend and save, jump-starting the financial rehabilitation, or 'deleveraging,' that economists see as a crucial prerequisite to robust growth." Who could have imagined that the personal catastrophes of record job loss and mortgage defaults would set the stage for a recovery in consumer spending "whose purchases account for about a fifth of global economic activity." To help put this in perspective, take the following case described in the article:
"Unable to sell their Arizona condominium for the $234,000 they owed on it, Mr. Brown and his wife Sandi did a short sale, in which their bank agreed to settle the debt for the price the condo fetched, or about $180,000. The move not only wiped out their mortgage debt, but cut their monthly housing expense from $2,000 to $1,500, the rent on their new two-bedroom home. With a pretax monthly income of about $6,000, the Browns can allow themselves some luxuries. But Mr. Brown said they are using nearly a third of their income to pay down about $38,000 in credit-card debt they had built up doing things like taking their grandchildren on trips to Disneyland."
The irony here, as I see it, is that U.S. consumers, banks and government have been taking far too many trips to Disneyland over the past decade. Consider the fact (from a Federal Reserve graph published in the print version of this article) that in 2000 the Federal deficit was $3 trillion+ and Household debt was double that, for a combined overspend of about $10 trillion. These numbers steadily increased with Household debt, outstripping the Federal deficit nearly 3 to 1 by 2007 totaling over $19 trillion. Household debt held steady in 2008 and shrank slightly in 2009 while the Federal deficit increased another $3 trillion over the same period.
Had this steadily rising graph appeared on the front page of The Journal -- and in all the other news headlines -- over the past decade, I strongly suspect that the amateur economist in all of us would have kicked in a whole lot sooner. This very likely would have softened the "crisis" that evolved and not left us grasping at how foreclosures and bankruptcies portend a quicker recovery than expected ... Spend matters, or in Borat's words, "what a country."