The Balance Sheet Recession Continues

Despite the fact that rates are down, fine print transparency is up, and people are starting to get new card mailings, Americans don't seem terribly interested in borrowing.  

The Federal Reserve Bank of New York today released its Quarterly Report on Household Debt and Credit for the third quarter of 2010, which shows that consumer debt continues its downward trend of the previous seven quarters, though the pace of decline has slowed recently. Since its peak in the third quarter of 2008, nearly $1 trillion has been shaved from outstanding consumer debts. 

Additionally, this quarter's supplemental report addresses for the first time the question of how this decline has been achieved and notes a sharp reversal in household cash flow from debt, indicating a decrease in available funds for consumption. According to newly available data through year end 2009, the payoff of debt by consumers reduced their cash flow by about $150 billion, whereas between 2000 and 2007, borrowing had contributed more than $300 billion annually to consumers' cash flow. 

 This is so Richard Koo and Japan that it's not even funny anymore.  I probably should put a moratorium on posting anything more about this, given that it's the same situation we had a year and a half ago.  The only new element is the Fed's decision to "do something" that will pretty clear not do what they think it will do; in Japan, QE2-N were gigantic non-events where the central bank gave money to the banks who sat on it for a while and then returned it.  Maybe you can argue that there's some cultural difference in the US (and there's a clear demographic difference, which is why I don't think we're going to get 20 years of stagnation) and that people are more go-go and inclined to roll the dice, but I think that they obvious place to do this is in the financial markets and not in the real economy.  Free money is not going to encourage anyone to actually start a business that they weren't going to start anyways, because the people who are supposed to be buying the stuff that the hypothesized business sells, are, in fact, using the money to pay off their credit card debt.  

We may see a terrific spike in commodities, stocks, and bonds.  Though the higher commodity prices part of this makes the new new bubble self-limiting -- $5 gallon gas will simply produce another US recession.  And then what?