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Private borrowing continues to fall

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The Wall Street Journal is reporting that private borrowing is continuing its decline while American savings are still on the increase:

Consumer credit in April decreased $16.5 billion, adjusted from a previously estimated $15.7 billion drop. Credit made a double-digit drop in March and in February, too.

U.S. banks have made it harder for people to get loans. A Fed survey of bank executives released in May showed larger fractions of domestic banks reported tighter standards for both credit-card loans and other consumer loans earlier in 2009. The Fed’s quarterly Senior Loan Officer Opinion Survey on Bank Lending Practices found banks expect credit quality to deteriorate over the year as economic weakness lingers.

The Fed data Wednesday on consumer credit signaled people are leaving their credit cards in their wallets. Revolving credit, which includes credit-card use, retreated in May by $2.9 billion to $928.0 billion, or 3.7%. Revolving credit fell $8.7 billion in April.

Nonrevolving credit, including automobile and mobile-home loans, dropped in May by 0.3%, or $367 million, to $1.592 trillion. Nonrevolving credit in April decreased 5.9%, or $7.8 billion.

Deleveraging among U.S. households is seen continuing even after the economy begins recovering. Many people feel insecure about their finances — and retirements. Some households are in the red; for those who aren’t, their wealth has shrunk. The Fed’s quarterly “Flow of Funds” report June 11 said total net worth of households fell 2.6% in the first quarter. Property values and stock market prices have fallen a lot, although equities began a rally in March.

The saving rate is at its highest in 15 years, the latest data showed. A Commerce Department report June 26 said Americans’ income soared in May, driven by the Obama administration’s stimulus package. Spending rose modestly; the saving rate was 6.9%.

With the above in mind, it now seems like a highly distant and remote possibility that inflation would occur. The increased savings rate has effectively meant that less, not more money has been borrowed from overseas, since larger deposits in banks has allowed them to purchase relatively safe Treasuries which are issued to finance stimulus spending.  So fears that foreigners who hold too much American debt (think China, who is actually losing its taste for Treasuries)  may acquire even more are largely exaggerated and unfounded.  So far most of the latest government borrowing has been domestic.  Krugman made this point in a CNN discussion with economist John Taylor here.

The continuing reduction of credit flow in the economy looks more certain to herald an age of deflation, despite the current all-time record low Federal funds rate of 0 to 0.25%. We’re witnessing a credit crunch on the level of consumers despite all the quantitative easing that has been done by the Fed.  This is why Krugman has been advocating a second stimulus package.

On a side note, one of the greatest determinants of inflation would be the price of oil, as anyone who witnessed the mega-inflation of the 1970s would remember (I wasn’t around yet, so that tells you how old I am).  Of course there were other factors such Nixon’s Fed Reserve artificially expanding the money supply to ensure his re-election, but the role played by the price of oil cannot be under-stated.  Krugman believes that given the weak fundamentals of the economy at present, the price of oil has been fueled (no pun intended) primarily by oil speculation.  So if anyone out there is truly worried about inflation, they’ll be better off aiming their rhetorical fire at oil speculators rather than Keynesian fiscal policies.

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Written by defennder

July 9, 2009 at 2:21 PM

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