Defaults account for most of consumer debt decline

[kcowan]

Just when we might think that the US consumer has reformed their borrowing ways, here is the main reason for the decline in household indebtedness:

Defaults Account for Most of Pared Down Debt - Real Time Economics - WSJ

 

[Gone4Good]

And yet . . .

I guess people aren't using their savings to pay down debt directly, but that doesn't mean balance sheets aren't improving.

 

[kcowan]

Maybe the higher unemployment figures are what bridges the gap?

 

[Gone4Good]

I guess the way I'd read these two charts is that some people are underwater and defaulting and those who aren't completely underwater are building liquidity (cash) rather than paying down debt.

As these are both aggregate statistics, I don't know how unemployment really affects things. The unemployed are probably borrowing more, but in order for the savings rate to go up, the rest of us have to save enough to more than offset their increased borrowing. But a doubling of the unemployment rate does make a near tripling of the savings rate seem more impressive (even if the savings rate is still kind of low).

 

[chinaco]

Interesting. Lower debt numbers track defaults.

It makes sense that people who ditched their bubble house (house and payment)... even if they repurchased a new house (at a lower price) would have less debt and consequently be able to save more (or spend more).

Behavior may not really be changing. Americans may not have changed their overspending ways... this could be a temporary anomaly related to bankruptcy and defaults.


That decline also represents increased house inventory (illiquid assets) and investment losses (plus taxpayer bailout losses).


The other comment in the article:

That said, the way U.S. consumers are shedding their debts isn’t encouraging. Aside from defaults, many are finding relief by refinancing mortgages at extremely low interest rates — the same low interest rates that are making it difficult for an increasing number of older folks to generate enough fixed income for a comfortable retirement. The relief might help debt-ridden consumers get into a position to start spending again sooner than they otherwise would, but the borrower’s gain is the saver’s loss.

So aside from investment losses and tax bailouts for the defaulters... The Treasury and Fed shifted money out of the pockets of investors into the pockets of new home buyers and people refinancing!

 

[ziggy29]

Seems simple to me. The more people that lose their jobs and default, the more those who still have jobs knuckle down and use cash flow to save, fearing they may not have one tomorrow and it's thus not a good time to go out buying a lot of "stuff."

Until that mentality breaks, there will be significant recovery, and it's also a chicken-and-egg problem.