Debt is both a facilitator and a crippler to increases in consumption: as debt loads rise borrowed monies accelerate consumption, and as debt levels drop monies that would ordinarily be spent on end products/services are instead used to lower debt. Ironically, assuming that all debts must be repaid in full, it would seem to be a zero sum game - credit alone does not, and cannot permanently accelerate consumer consumption if such debts are ever to be repaid.
With this in mind, there comes a point in time when the consumer's acquisition of debt hinders the likelihood of increases in spending. Admittedly, and in light of the late 1990s borrowing binge, such a point is not predictable, rather only inevitable: If 100% of personal income were needed to pay debts each month, rest assured many consumers would not be taking in a ball game, treating the wife to a buffet diner at Ponderosa, and snapping up bargains at Wal-Mart.
The 'point' where debt transforms from consumptive facilitator to consumptive crippler is what puzzles economists most. Since there is no irrefutable value (except the absurd 100% debt burden example) by which to determine how the consumer will spend in the future, economists are left to sort through confidence statistics, debt ratios, and wealth effect concoctions to determine how the consumer may or may not spend. Needless to say, the statistical variants that can be weaved together to foretell what will be inside the consumer's basket tomorrow are endless. For instance, take confidence: optimists are assured by rising conference board readings, yet the pessimists are looking at an ABC confidence report mired at 5-year lows. Which party has fashioned the correct stance? Then there is spending: a better than expected retail sales report for December (-0.1%) has some people feeling the consumer is 'not tapped out yet', while others look at nearly bankrupt Kmart and feel the exact opposite. Again, who will be right? Finally, one must consider the possibility of the organized mass of capital in the Cayman Islands shorting the U.S. dollar, or the next Bin Laden loving miscreant striking an American target. Given the unexpected rebound in consumer sentiment following 9/11, who knows what either of these two events would cause the consumer to feel in the future? Can any analytical model take these possibilities into account. In fact, you can mesh together any set of circumstances to justify tomorrow's consumptive patterns you wish, but the patterns are uncomfortably nonconforming.
Which brings us back to debt: the facilitator and crippler. Given that there is no strict set of debt factoids to determine how the consumer will or will not spend, the best we can do is speculate.
To notice first how debt cripples spending flash back to 1991, or the last U.S. economic recession. As the U.S. economy eased into recession consumer credit dropped, and remained unstable over the next three years. However, by May 1993 consumer credit was back to its former girth as economic expansion was well on its way.
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The important factoid in the above chart is that the household debt burden was relatively high on a historical basis when recession began, and significantly lower as expansion came around. As such, even though consumer credit was at the exact same level in April 1993 versus November 1990, the consumer was, in fact, more prepared to spend.<br />
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Now, take a gander at some more recent charts. The first chart looks at the debt burden from May 1993 onwards, while the second shows consumer credit since March 2001 - when the current recession began. <br />
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While the trend has been much the same as that during the last recession, the fall in the household debt burden has not yet been comparable. In fact, when considering that in November consumer debt expanded by a record amount, and that in late 2001 credit cards were racked to purchase underwear as stocking stuffers, one could argue with much assurance that the dated (3Q01) debt burden is now higher than it was back in 1Q01 (14.22). To be sure, the debt burden is probably higher now than it ever has been before. <br />
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Households own a record high debt burden as a percentage of disposable income and the consumer will pull the U.S. economy out of recession?<br />
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How such a strange set of circumstances has come to pass is highly debatable. However, since September the debt burden patterns have been suggesting one thing: the consumer is not saving. The basic trend during recessionary times is for the consumer to save more money. However, following September 2001, for whatever reasons, the consumer has done the exact opposite.<br />
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From July 01 to September 01 people slowly began to save more money. This is a normal occurrence during a recession because confidence drops, people are losing their jobs, and high debt burdens are looked upon as unfavorable. With this in mind, the spike lower in savings from October onwards can be called anything but normal.
Perhaps 'patriotic spending' is to blame for the reduction in savings since September. Perhaps also such a trend can be sustained and continue to combat the previous pro-savings, anti-debt campaigns consumers were indoctrinated with during previous recessions. Perhaps...
In conclusion, confidence reports, asset prices, and spending patterns are important when trying to determine what the consumer will do tomorrow. However, these particulars offer commentary to the story, they are not the main characters. To be sure, even the most confident consumer cannot absolve their debts, or continue to take on more debt into infinity. Likewise, and as the most recent bear market will attest, looking at stock market (asset) gains to determine consumer spending is a supercilious pursuit: American stocks lost trillions in value since March 2000 while the consumer has continued to spend wildly. Regardless, while debt can be both a facilitator and a crippler of economic growth, only one conclusion becomes apparent in this case: the load on the consumptive crutch of debt has never been greater, and it is only a matter of time before it shatters.
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