Monday, March 30, 2009

Who Will Borrow?

From IBD:

The Treasury and the Federal Reserve are throwing trillions of dollars at financial firms to prod them to lend more. But even if those programs succeed, debt-strapped families probably won't want to borrow hand over fist.

This is the key question to ask regarding the credit crisis: once banks are back on their feet, who will take out loans.

Let's start with this:

Consumers are saving more to make up for a 20% drop in the median U.S. home price and a nearly 50% decline in stock prices from their peaks.

Since the second quarter of 2007, households have seen their net worth drop from $64.361 trillion to $51.476 in the 4Q08. This is a drop of 20%. Most importantly, the two most important asset classes are -- stocks and houses -- are falling. In other words, there is no place to hide.

In addition there is already a ton of household debt in the system. Total household debt in 4Q08 stood at $13.8 trillion while total GDP stood at $14.2 trillion. In other words, there as nearly as much household debt as there was GDP.

As a result of all the debt and drop in two primary assets, households are saving more:

What will change this behavior from an increase in savings to an increase in spending? I'm not sure. There are some who are arguing that we are moving into a "return to frugality" where consumers can't be counted on to provide 70% of GDP growth, I think this is entirely possible. However, if the following happens this "return to frugality" could be thwarted:

1.) Meaningful job growth returns for an "extended" period of time. My meaningful, I'm thinking at least 125,000 for 4-6 months.,

2.) There is meaningful increase in incomes.

3.) Stocks return to profitability.

4.) Real estate starts to steady.