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DEFLATION is revealed in ‘micro-data’!

September 8, 2012

Consumer behavior appears to be changing and this means ‘deflation’ down the road!

NEW YORK (CNNMoney) — Americans continued to shy away from credit cards in the second quarter, but kept taking out auto loans. Credit card balances declined to $672 billion, down 22.4% from their peak at the end of 2008, according to the Federal Reserve Bank of New York’s quarterly debt report issued Wednesday.

Not only are consumers cutting back on credit card debt but the number of credit cards in circulation has deceased some 23% since the peak of 2008. The number is now at 383 million cards vs 500 million in 2008. Also, the number of new applications is continuing to decline. This micro data suggests that consumers are changing their financial behavior and this means deflation down the road. Some 70% of spending consists of consumer spending.

Also, total consumer borrowing is now at $11.4 trillion (06/2012), down some 1.3 trillion from the peak of 2008. The primary cause of this decline is a fall in mortgage debt. Net repayments of mortgage debt were $213 billion in 2010 and $241 billion in 2011. Gradually, consumers are deleveraging their portfolios and changing their behavior regarding new debt. This is positive behavior from our private sector.

The biggest exception to this trend are student loans. Student loans are still rising and debt repayments are stalling. The total amount of student loans is now approaching $1 trillion. This is greater than all the credit card debt. The next ‘sub-prime’ crisis may be student loan debt. The total debt was around $250 billion in 2003 and is now over $900 billion. Delinquencies have increased from 6% in 2003 to 9% in 2011. If our economy stalls in future months we could witness delinquencies in this sector reaching bubble levels!

What are some lessons that we can learn from these trends? First of all, I would suggest the Ben’s QE policies have not changed the basic human desire for deleveraging. Consumers have a current desire for less debt and deficits. Also, the low-interest rates set by the FED have not reversed this trend towards deleveraging and less debt. At the micro-level, consumers are demonstrating that debt is our PROBLEM and they are doing something about it.
The public sector of our economy, however, has not learned any lessons from the Crisis of 2008. The public sector continues to inflate debt and deficits with the assumption that consumers will follow. Americans sent a message in November 2010 that public DEBT and DEFICITS are a problem that they want to reverse…yet the message has not taken hold with our politicians. Our public debt now exceeds $16 trillion and our deficits continue to exceed $1 trillion annually.
Will the election of 2012 finally send a NEW and POWERFUL Message to these leaders? November 6, 2012, is now only 59 days away. I, personally, sense that a new message will arrive and this will eventually lead to our DEFLATIONARY collapse. It must happen to CLEAR all the accounting mis-allocations and all the market based mal-investments!
Hyper-inflation can not occur today given our computer (digital) based financial system. Ben is NOT ‘printing’ paper notes that get to consumers (for immediate spending)! His policies merely help those who need to  protect their ‘insolvent’ accounting books! Think about the non-System that we currently use for our monetary transactions! Money is not being spent by consumers to the extent necessary for hyper-inflation to occur! (this website provides comprehensive date on all public finances).

Watch the markets as major events are brewing.

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