McDuffee -- Dangers of debt nicely illustrated

I'd say it's the dangers of a lack of growth of disposable income Ig.

-- JC

Thanks for the link -- I missed this one.

This should give everyone a shot of colds p*** to the heart when you consider the possibility of deflation, which to some extent is already occurring, i.e. wage cuts.

With debt service at these levels, even a slight downturn in employment will be serious, and if serious deflation kicks in on top of that it will be catastrophic as wages will fall while the debts remain as denominated.

We have never seen these types of debt service levels. as a percentage of income since the depth of the last depression [1935]. Unfortunately, if we have even a moderate deflation, the ratios will be considerably higher that the depression.

No one knows what a 20-25 % of income as debt service will produce, other than huge numbers of bankruptcies with devastating impact on the CDOs based on credit card receivables, student loans, vehicles, and of course residential/commercial mortgages.

Interesting that one of the "solutions" to the Detroit auto crisis is to deflate wages. Good thinking..... Unka' George [George McDuffee]

------------------------------------------- He that will not apply new remedies, must expect new evils: for Time is the greatest innovator: and if Time, of course, alter things to the worse, and wisdom and counsel shall not alter them to the better, what shall be the end?

Francis Bacon (1561-1626), English philosopher, essayist, statesman. Essays, "Of Innovations" (1597-1625).

I find this graph to be fascinating, and very thought provoking, but cannot yet come to good conclusions, or perhaps I am in denial.

Note that this graph does not include a) government debt and b) commercial debt. The commercial debts are very prone to becoming economically unmanageable if further deleveraging occurs, even more than household debts.

That graph says that debt service was at its highest three years ago, and that all components are now on the way down.

Here's a better graph of the current situation. This probably is the source for the graph above:

-- Ed Huntress

If you want to see more graphs of this kind of data than anyone could want, go to the St. Louis Fed's research site. They're using mostly Census and BEA data, but they have an excellent interactive system for showing it all graphically.

But it's too small to identify it as a trend. It could be a year-end accounting phenomenon. In any case, that Fed site is an economic data junkie's wet dream. d8-)

-- Ed Huntress

========= Thanks -- I like original source data.

Unka' George [George McDuffee]

------------------------------------------- He that will not apply new remedies, must expect new evils: for Time is the greatest innovator: and if Time, of course, alter things to the worse, and wisdom and counsel shall not alter them to the better, what shall be the end?

Francis Bacon (1561-1626), English philosopher, essayist, statesman. Essays, "Of Innovations" (1597-1625).

Much better but it ignores the question of whether debt "exploded", DI fell or both. It wouldn't be hard to make the case that the problem isn't the debt but the income side of the equation I've been bringing this up for years - two decades in fact. I've been an econometrix subscriber for a while now Ed. Have you seen their service?

JC

Well, you can fish around in the St. Louis Fed stats to find almost anything. Here's CMDEBT (household debt):

Yeah, that's it. The recent income graph shows the inverse of the debt-service-as-a-percentage-of-income graph:

No. I waste enough time with this stuff already.

-- Ed Huntress

============ Indeed.

One of the major problems is that much of the current deflationary wage cuts are increasingly taking the form of the elimination of benefits and 401k matches, sort of a stealth deflation in that this does immediatly impact employee disposible cash income printed on the check stub.

For a good discussion of the effects and a listing of some of the major corporations that have just cut the employee wages by 20% or more see

While the headlines in the media are all about the stimulus bill coming out of Congress and the Treasury?s bailout plan, there has been little media attention being drawn to a disturbing and growing phenomenon that is seriously impacting the potential retirement savings for employees, namely, the cutback in the corporate match for employee 401(k) plans.

In an effort to cut costs, a number of companies are suspending ? temporarily they say ? the matching funds for retirement plans. This means that employers are relieving themselves of the costs associated with employees? retirement benefits. Included among those companies that have made such announcements this year are US Steel, Sears Holding, Federal Express, Motorola, Kodak and General Motors. Starbucks is also considering such a move.

---------------

Note that in many cases these stealth wage cuts are retroactive, going back many years with the elimination/reduction of retiree benefits. These are in fact defferred wages earned for labor years ago. In the case of medical coverage -- tough darts, but for actual pension income, these will be shifted to the taxpayer via the PBGC, up to a significently lower cap. (Medical costs are also shifted to the taxpayers via Medicare.)

Unka' George [George McDuffee]

------------------------------------------- He that will not apply new remedies, must expect new evils: for Time is the greatest innovator: and if Time, of course, alter things to the worse, and wisdom and counsel shall not alter them to the better, what shall be the end?

Francis Bacon (1561-1626), English philosopher, essayist, statesman. Essays, "Of Innovations" (1597-1625).

The Barrons graph went back to the 1930s, and showed debt et al at levels equal to toady, just before WW2. The FRED plot only goes back to

Joe Gwinn

Well, take a look, Joe. Those are interactive graphs -- you can set them back to the beginning of the data series. Set the time range to something other than "Max" and it will open a new graph with additional tools to set the time range.

And, in addition to FRED, there's an archival dataset called ALFRED...

The historical contexts are always interesting but you have to be aware of the history of events and financial structures to recognize what they're telling you. Another thing to watch for: Some of that data is just total numbers for the country, not per-capita, so population increases have to be taken into account.

Most of the data is adjusted for inflation, but, again, look at the title of the graph. And if you want to go beyond the FRED data, the Bureau of Economic Analysis (BEA) has much more. It's just not as slick in the graphing department as the FRED data is.

-- Ed Huntress

Most stop short. But some do go back a goodly bit, such as to 1919. It will take some digging to find the few long-term data series.

Takes lots of research to be sure. But we do have to widen our view if we are to have any idea what is usual versus unusual.

Joe Gwinn

I have to provide the black-box warning: For some personality types, it's addictive. d8-)

There is another entire layer of this data, which is for the real hard-core. It's the various Census reports, which break things down into fine particles and that go back as long as data was kept. As it is now, and as it's been for decades, the data is presented in spreadsheets that don't even have plain-language labels. It's all coded numbers and letter combinations. Sorting through it, with the aid of a spreadsheet program, is deadly. But it's what I used to have to do to produce reports on manufacturing industries, for years.

There's a heap of data available, though, if you have the need or interest to get into it. The FRED graphs are a vast improvement and the government has made great progress in making all of this stuff more accessible and manageable. It's an ongoing project.

It's reached the level of practicality that I don't hesitate to suggest that people with a strong interest in what's happening with our economy take some time to look into it. The things you're looking at, FRED and ALFRED, are really worthwhile. It dispels a lot of myths and it shows how superficial, and often misleading, press reports can be.

You seem to be interested in gaining some historical perspective and for that, the data is great.

-- Ed Huntress

Umm. This explains a lot... starting with but not limited to the glasses .......

I certainly do not have the energy to be mining those old spreadsheets, so FRED is going to be useful.

My more general complaint about many statistical arguments one sees is precisely that they don't go back far enough to see how things really work. Like those financial models that failed to include market crashes, thus leading some companies into failure.

Joe Gwinn

You can learn a lot by looking at those graphs, even if you don't have a background in the field. But be cautious in drawing conclusions. Particularly with the historical data, the history *itself* needs context -- a historical view of events and trends in policy, changes in the state of technology, and so on -- to make sense of it.

For example, it's a common misconception that manufacturing has been in decline in the US for a long time, which people conclude after seeing how the percentage of GDP represented by manufacturing has dropped, and after looking at employment figures. But manufacturing has in fact steadily climbed in dollar output. The rest of the economy has just grown faster, and productivity improvements keep reducing the need for workers.

There are many stories like that.

-- Ed Huntress

--------------- But - but -but If we included that data the model wouldn't work, and the boss has his heart set on that model working so he can get his bonus... Its only a few data points...

Unka' George [George McDuffee]

------------------------------------------- He that will not apply new remedies, must expect new evils: for Time is the greatest innovator: and if Time, of course, alter things to the worse, and wisdom and counsel shall not alter them to the better, what shall be the end?

Francis Bacon (1561-1626), English philosopher, essayist, statesman. Essays, "Of Innovations" (1597-1625).

How far back have you chased constant-dollar volume of manufacturing? It would be interesting to see it past WW2.

Joe Gwinn

You can easily go back beyond the Civil War Joe.

JC

I think that 1947 is as far back as I've gone for detailed reports; 1929 for some general ones. Mostly my clients and employers have been interested in the period from 1960 or so.

If you want to go back a lot farther you'll need to see the Statistical Abstracts of the United States, which are mostly available as scanned files from the printed pages. If you're game:

For some reason, Census, rather than Commerce, has the broadest array of data. One you should know about is the M3 reports. Reading those tables will make you blind, but if you really want fine data on manufacturing (at least from 1958 onward), it's there:

-- Ed Huntress