Hair of the dog

Another green shoot sighting!

For the first time since the Great Recession hit, American households
are taking on more debt than they are shedding, an epochal shift that
might augur a more resilient recovery.

For two of the last three quarters, American households’ total outstanding borrowing on things like credit cards, mortgages and auto loans has increased after falling for 14 consecutive quarters before then. Some economists even see an end to the long, hard process of deleveraging — as they refer to the cutting of debt relative to income or the nation’s economic output. That process, they say, has been a central reason for the extraordinary sluggishness of the recovery.

This increase in household debt is a sign of desperation, not recovery.  There are two times when households increase debt, when things are going well and when things are going very bad.  It defies credibility to think that household finances have improved when unemployment remains historically high and food stamp usage is at all-time highs.

To me, the key indicator of the next stage of the economic collapse may be college loan debt.  It is the only debt sector that has remained strong and grown since 2008.  Graduates who can’t find work have returned to school with the objective of improving their employment prospects and they are going more deeply into debt in order to do so.  This is the last gasp of the education bubble which Instapundit and others have been warning for the last three years.  Once awareness of the fact that more academic credentials do not ensure employment, only a deeper debt hole, begins to sink in with parents and students, we can expect to see a dramatic decline in education-related borrowing.

Note this section in particular: “Americans have also improved their personal balance sheets by slashing their outstanding credit card debt to $855 billion today from more than $1 trillion in 2008, according to Federal Reserve data. But student debt has continued its inexorable march higher, a “worrisome” trend that economists say could stop young workers from starting new households or could eat into their spending on other goods and services.”

It is interesting to see that the idea there is a relationship between debt growth and economic growth is finally percolating into the mainstream economic coverage.  Back in 2002, when I first publicly warned about the potential effects of the housing bubble on the financial system, almost no one understood what I was talking about.  Perhaps in another 10 years, it will finally be acknowledged that there hasn’t been any economic growth since 2001 as all of it has been nothing more than an artifact of expanding debt.