0xC9: Americans' debt shrinks

According to a CNN article: Household debt fell by 0.8% as Americans' net worth fell by largest amount on record on declining home and stock prices.

Is it a coincidence that household debt fell while our nation's net worth fell at the same time? No. Keep reading. Here's the article (indented) with my comments (non-indented):

NEW YORK (CNNMoney.com) -- In a sign that Americans' spending habits are shifting, their household debt fell for the first time ever, as their net worth declined by the largest amount on record based on data going back to 1951.

According to the Federal Reserve's flow of funds report released Thursday, consumer debt fell an annualized $30 billion, or 0.8% in the third quarter to $13.91 trillion.

Americans holding less debt may sound like a positive, but it also means consumers are spending less, as debt has become more expensive and harder to come by.

Are you starting to see it, kids? Holding less debt is positive, but the establishment and status quo (like CNN) is having a hard time admitting it. The people are starting to see it, though. Finally.

Money is debt. Debt is money. See the video in a previous article for an explanation of this paradox.

As the credit crunch intensified in the third quarter - and exploded late in the period with the bankruptcy of Lehman Brothers - Americans were increasingly unable to finance big purchases like homes, cars and big-ticket goods.

"Interest rates have shot rapidly higher in the last few months, and people are borrowing less because they don't want expensive credit hanging over their heads," said Michael Englund, chief economist for Action Economics. "The other component is the credit crunch, where qualified borrowers are unable to get credit."

That's a worrisome sign for the economy, as consumer spending makes up 70% of overall U.S. gross domestic product. The economy entered a long and deep recession in December 2007, and the prospect of a turnaround will weigh heavily on consumers' confidence to spend money.

There is another way. But if we got into this mess with easy credit, more easy credit can't be the solution.

"Everyone over the past three months decided to become thrifty at the same time, but our incomes depend on other people spending," said Englund. "If we all start saving and cut back on our spending at the same time, it means more people will ultimately get fired."

Many who have not yet embraced frugality are going to have frugality embrace them.

- Mish

Yet, if we look at this year-over-year, American taxpayers are now on the hook for an estimated $8 TRILLION in total spending and "commitments" by the government in its desperate attempt to prevent a total meltdown of the financial system — yet stocks continue to tumble, banks refuse to lend, and the economy keeps sinking!

And I bet you thought Congress only authorized $700 billion. I guess that depends on what your definition of "thought" is.

So while Americans try to save, and there's a mountain of debt piled on top of them involuntarily by their servant government. What's the point in saving then?

Well, it can't get any worse, right? I mean, as long as the government spends, we can at least keep our jobs, right?

The U.S. economy has shed 1.9 million jobs so far in 2008, with precipitous declines since September. As more Americans keep their wallets closed, Englund said the economy has entered a vicious cycle, in which Americans spend less and have less to spend.

D'oh!

And fourth-quarter debt data is likely to be even lower, as the peak of the credit crisis came in mid-October.

"There has been a particularly steep rise in the savings rate recently," said Englund. "With a large part of thriftiness due to panic, this trend could continue for a long time."

See that? There's another example where the author links the problem to lack of spending, so savings are bad, umkay? This s diametrically opposed to what we know is right. Saving is good. Just don't save dollars. That's partially why everyone is confused; they've monkeyed with our money supply.

It's all related. Prices in one sector falls, spending holds back to wait and see when the falling stops, which causes prices to fall further and spread to other sectors. The government steps in to keep the prices from falling further which causes the market to become uncertain which causes prices to continue to fall. The government solution is to keep bailing out by printing more money. And they have promised they will never stop printing money.

Net worth in 12-month tailspin

Consumers watched their net worth decline for the fourth quarter in a row as it dropped by $2.8 trillion, or 4.7%, to $56.5 trillion, dragged down by precipitous declines in home values and the stock market. It was the largest decline in the 57-year history of the report.

It's interesting that the author tries to pass this off as unrelated to the previous section, other than the fact that they happened at the same time. Of course, how does one imply causation in financial journalism? So maybe by putting them in the same article, the reader needs to make that leap. Good enough.

But if we're spending less and saving more, how can this be? Because money is debt and debt is money. Lower one, you lower the other.

The first quarter's decline follows wealth declines of $393 billion in the second quarter, $2.4 trillion in the first quarter and $1.5 trillion in the fourth quarter of 2007. Until then, net worth had been rising steadily since 2003, climbing nearly 31% over those five years.

Further confusion. Trying to equate wealth with money is a problem. You cannot print wealth, but you can print money. And merely printing the money doesn't cause it to get into the economy. It must be lent, thus easy credit.

The four quarters of declines have resulted in a net 11.1% decline in Americans' wealth in the last 12 months. During the bear market of 2000 through 2002, household's net worth dropped just 6.2%.

The net value of financial assets for households fell by $2.1 trillion, or 4.4%, led mainly by declines in stock holdings and mutual funds.

Americans' share of corporate equities plummeted $943.5 billion - an 11.5% drop - in the quarter to $7.3 trillion. With major stock indexes like the S&P 500 falling 40% or more since January, shares of mutual funds, a primary investment of 401(k) retirement funds, declined $597.4 billion, or 12.4%, to $4.2 trillion.

Financial assets account for about two-thirds of households' net worth, but consumers have also been hit hard by sinking home prices. Home values declined by $347 billion in the quarter to $19.1 trillion.

"Consumers are going through a major change in their spending and savings habits," said Lyle Gramley, a former Fed Governor. "Throughout the housing bubble, consumers had a savings rate of zero, relying on the rising price of their homes. Now they're saving money for the future instead of spending it."

Too bad they're saving dollars that are backed by nothing (backed by debt, which is nothing physical). The less debt, the less "value." So we should trash this debt based economy. It's such a waste of effort.

But the government will never see it that way. At some point, Obama's New New Deal will kick in to replace the spending, then the real fun begins. The government credit will replace the consumer credit. Bailout after bailout, leading to more war, more overall destruction. Can't we see where this is going? Total nationalization of the US Economy?

Want change? We all want change, don't we? How about small change? That's all we'll have when this is over.