In the past year leverage has been one of the most overused
terms in explaining the causes and ramifications of the economic crisis. It has
been applied specially to the gearing of investment banks and hedge funds, now
supposedly cured of their addiction to leverage. Excessive leverage has
also been blamed for the inhibition of commercial bank
lending by the billions of dollars of devalued asset-backed securities on their
balance sheets. Less attention has been paid to the equally
important consumer side of the leverage leger.
It has been a general presumption that the blame and the
cure for restricted lending lies with the banks. Once the impaired securities
are removed from their books banks will be able to resume their normal business
role, lending to consumers and businesses, creating money through their loans
and letting the populace regain its debt fueled purchasing habits.
Purged of bad assets banks could again extend credit to
businesses and consumers who would invest and spend and return the economy to
robust growth. The essential credit function of banks is unchanged though
perhaps subject to stricter standards than in the bubble years. The real
question is not whether the banks will lend when their books are clear, they
will, but will Americans borrow? Are the consumersâ€™ free spending ways
just waiting for the resumption of credit?
Has the economic crisis wrought a permanent change in
consumer attitudes? Will the old consumer complacency towards consumption
and debt resume when the Federal stimulus check start arriving or job creation
begins again? Or has this crisis changed the US economy by changing the outlook
of the US consumer?
Long term changes to consumer attitudes are difficult to
track but there is some indication in retail sales and in consumer credit that
this crisis has had an earlier and deeper effect on spending and consumer
outlook than usually realized.
Consumer credit has been contracting since mid last
year. Consumers have been deleveraging, paying down credit lines instead
of spending. In December consumer credit fell $6.6 billion. The
majority of that reduction, $6.3 billon, was to revolving credit, essentially
credit cards and lines of credit that can be utilized at the discretion of the
borrower or consumer.
Nominal retail sales have been negative only since July last
year, except for February they were positive in the first half of 2008. It
seemed that consumers had continued to spend freely despite the long running
housing crisis and the steep fall in job creation almost until the banking
crisis struck in September and October. Such apparent resilience in the face of
an economy that had worsened steadily throughout the year might bode well for a
return to normal spending once the extraordinary restraints of the credit
crisis are removed.
However if one examines real retail sales, corrected for the
effect of rising and falling prices they tell a much less optimistic
story. Real sales were static in the first half of 2008; the three
monthly rises of 0.2% in March, April and May were negated by contractions of
0.5% in February and 0.8% in June when the current string of negative months
began. In fact the negative monthly numbers are unbroken from August 2007
with the three exceptions above and a flat January 2008. This is a much
more cautious consumer than generally depicted. Bank credit has not been
restricted since the late summer of 2007, that crunch started in earnest last
fall, but the fall in real retail sales began a year earlier.
If and when bank lending is no longer contained by balance
sheet problems and credit begins to flow again, then those people who can
afford new cars and homes but have been unable to find credit will
purchase. These borrowers will have to meet the new stricter standards that
banks have instituted. These standards must necessarily reduce the number
of eligible borrowers for all types of credit.
The lax mortgage standards of the housing boom contributed
much to the housing bubble by granting mortgage credit to folks who had little or
no real chance of honoring the terms of the contract. That group of purchasers
is now shut out of the market. The pool of potential home buyers,
to take just one market, has been substantially reduced. What percentage
this group was of the total pool of potential home buyers is difficult to
tell. But what is certain is that all types of consumer credit now have
much stricter standards. Consumer credit cannot return to pre-crash
levels because the pool of eligible borrowers is now smaller. If consumer
credit is now permanently tighter, consumer spending will be lower for the
But the reduction in eligible borrowers is not the main
factor depressing consumer spending.
Fear of unemployment is a much heavier burden for consumers.
But even the stunning job losses in the fourth quarter are not the whole story
for consumer planning. The unusual and desperate circumstances of the credit
freeze last fall, the failure of Lehman and disappearance of every major US
investment bank, the national election, the gargantuan fiscal stimulus and
President Obamaâ€™s apocalyptic rhetoric make for an uneasy future even for the
most determined optimists.
The recovery scenario for the US economy has consumer
spending in its primary and profligate place. That reliably cheerful consumer
is likely to have disappeared in the financial crisis as surely as Lehman
Brothers and Bear Stearns.
IMPORTANT NOTICE: These
comments are for information purposes only. Past results are not necessarily
indicative of future results. FX Solutions, LLCï¿½
believes that customers should be aware of the risks associated with
over-the-counter, spot Forex. Forex trading is highly speculative in nature
which can mean currency prices may become extremely volatile. Forex trading is
highly leveraged, since low margin deposits normally are required, an extremely
high degree of leverage is obtainable in foreign exchange trading. A relatively
small market movement will have a proportionately larger impact on the funds
you have deposited. You may sustain a total loss of your funds. Since the
possibility of losing your entire cash balance does exist, speculation in the
Forex market should only be conducted with risk capital you can afford to lose
which will not dramatically impact your lifestyle.
To the best of our
ability, FX Solutions believes the information contained herein is accurate and
true. We reserve the right to make corrections and/or update the material when
deemed necessary. Therefore, FX Solutions assumes no responsibility for errors,
inaccuracies or omissions in these materials.
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South, Suite 260, Saddle River, NJ 07458
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