More Bad Economic News: Consumer
Credit (Borrowing) Collapses

Evidence of the slowing U.S. economy has been well documented in these pages. While the occasional economic data might suggest there are spots of recovery in the U.S. economy, I see these as tiny bounces in a bigger scheme of things.

The biggest problem, as elementary as it sounds, is that consumer confidence in the U.S. economy is collapsing. In order for the U.S. economy to grow, consumer confidence has to be robust.

The U.S. economy is based on consumption and more than two-thirds of gross domestic product (GDP) in America consists of consumer spending. If consumer confidence is low, consumer spending is low—damaging the U.S. economy.

Consumer credit (how much people borrow to spend)—considered to be a key indicator of consumer confidence—fell to $3.3 billion in July, the first drop after 10 months of positive data. (Source: Federal Reserve, September 10, 2012.)


The decline in consumer credit report has caught the U.S. economy by surprise. As a reader of Profit Confidential, it should not have caught you by surprise. I have been saying this for sometime now—consumer confidence is on its death bed.

Consumer confidence is in the slumps because the U.S. economy is in a horrifying state. You can’t blame consumers; they are right. They are justified in their lack of confidence in the U.S. economy. Persistent high unemployment, unequal job creation, depressing housing prices, declining real personal incomes, the eurozone crisis, a slowing economy in Asia, the domestic fiscal cliff, and the list goes on and on…

The country is also currently experiencing a shift in wealth. It used to be that the middle class ran the country. Now it’s the opposite—the middle class is dying out. The gap in the U.S. economy between the rich and the poor is increasing and the middle class is the one getting hurt.

According to the Economic Policy Institute, the wealth of the top one percent of the U.S. population dropped 15.6% from 2007 to 2010, while the wealth of median net worth American households sank at three times that rate: 47.1%! (Source: CNN Money, September 11, 2012.)

It’s obvious that consumer confidence in the U.S. economy is moving in the wrong direction. For economic growth, consumer confidence has to increase, and consumers need to feel comfortable while spending. If they are unsure about what will happen with the economy, those who do have money and the capability to borrow will hold back.

Economic growth happens when wealth in an economy is created—and this is clearly not being witnessed here in the U.S. economy. My belief stands: the U.S. economy is drowning and oxygen is running out. Another round of quantitative easing by the central bank will pump more liquidity into the monetary system, but it will not pump oxygen into average Joe American.

Michael’s Personal Notes:

Congratulations; you now have $51,000 in debt. Surprised to know? I am not. U.S. national debt has now surpassed $16.0 trillion. (Source: Debt Clock)

If taxpayers are the only ones who will be accountable for the $16.0 trillion, each American taxpayer owes a little more than $140,000 of the U.S. national debt. This shouldn’t come as a surprise. I have been harping about the increasing debt level in the U.S. economy for years.

In 2007, U.S. national debt stood at $9.0 trillion and, in the last five years, it has gone to $16.0 trillion—an increase of $7.0 trillion. (Source: Pravda, September 6, 2012.) Math would tell us that the U.S. national debt has grown by 78% in five years!

Looking at dire state of the U.S. economy, the odds are high there will be more debt added. And the more government borrows; the higher the interest payments it will need to pay.

How much will the U.S. government borrow? We don’t know the answer. Depends on who wins the election, whether Congress and the White House are on the same side, tax increases, cuts in spending, and lobbyists. What we do know is that the U.S. national debt limit is set to $16.4 trillion, but that limit keeps getting increased.

Sadly, I have to point this out again: the U.S. economy is following the path of the eurozone countries. Don’t believe for a moment that the U.S. can never reach the level of the crisis now being experienced by the eurozone countries.

Sure, debt ceilings are good measures to have in place, but they have proven ineffective. The government seems to just raise the debt ceiling because it knows that it can borrow more, as the more-than-ready central bank will print money as needed to buy government debt so the government can cover its obligations. Long-term, this practice will destroy the dollar (good for gold bugs).

This is an election year. You will hear claims made by politicians about how they can fix the U.S. economy. Unfortunately, the underlying structural issues within the U.S. economy are still the same. The debt time bomb keeps ticking with no end in sight. EuroAmerica, here we come?

Where the Market Stands; Where it’s Headed:

All eyes are on the Federal Reserve as it starts its regularly scheduled two-day meeting of the Federal Open Market Committee. The stock market has already discounted (built in) tomorrow’s announcement of a third round of quantitative easing (QE3). If the market doesn’t hear what it wants to tomorrow afternoon, watch out.

If the Fed does come through and announce some form of QE3 tomorrow afternoon after the conclusion of its meeting, it will be very interesting to see if the market rallies or yawns. Could the final blow-off for stocks be here? Stay tuned.

We are near the end of a Phase II bear market rally that started in March of 2009.

What He Said:

“Even the most novice investor can now read the chart of the Dow Jones U.S. Home Construction Index and see that it is trading at its lowest level in five years. If, like me, you believe that stocks are an indication of what lies ahead, this important index is telling us housing prices are headed to 2002 levels! What would that do to the economy? Such an event would devastate the U.S.” Michael Lombardi in Profit Confidential, December 4, 2007. That devastation started happening the first quarter of 2008.