Posted by: John Gilmore | September 16, 2006

Debt Shows First Drop as Slump Squeezes Consumers

At first glance, this seems like good news – Americans are actually reducing their debt. In a sane world with a sane monetary system – it would be. The problem – as we’ve discussed many times – is that debt creation is required in our current monetary system. We must continue to create debt each year equal to the aggregate rate of interest on all outstanding debts (as Chris mentions below) – or serious problems will begin rippling throughout the system – which we see happening everyday now. The debt required each year is now a very big number – and it’s getting bigger. So, when we see that debt is actually being reduced, it’s a very bad thing for a debt-based monetary system. This is the opposite of what we’d expect. We would like to think that paying off our debts would be a good thing – but it’s not a good thing in this system. The Federal Reserve obviously knows this – which is why we see them ‘injecting’ more and more money into the system by various means. Someone must pickup the slack in debt creation – it is required for the system to function.

This illustrates just how backwards our nation and the world has become. While God warns against becoming indebted to a lender, the world rewards us for taking on more debt. The reason? Because someday your debts are going to come due – and when you can’t pay – what you have will be taken from you – just as the Bible tells us. So, we are living in a monetary/economic system that rewards us for choosing the world’s ways over God’s ways – even though this will eventually lead to economic ruin. Surprised? You shouldn’t be. When we follow the world instead of God – this is the type of deception that we should expect.
Satan is the source of all deception and opposes God and His ways – on everything. Never forget – our spiritual enemy does not have a 75 year time horizon. He instituted systems within the world years ago that will allow him to gain worldwide control – over generations. How did he deceive us this long? We have focused on the here and now – on our wealth and power – and we have been blinded to the long term effects of what this will do to us. We have been tempted – and have given ourselves over to these temptations.
I have heard many Economists and ‘experts’ say that the current economic problems in the world today (U.S. negative account balance, world’s debt levels, etc.) cannot be sustained forever – and will need to be corrected at some point ‘in the future’. It’s much easier to push the hard choices into the future instead of seeking solutions today. We see this behavior inherent in our leaders – there has been no fiscal responsibility – and there still isn’t. In fact, it’s getting much worse with all of the ‘bailouts’ and ‘stimulus’ packages. Each generation has passed the problem on to the next – and as this problem has been passed – it has gotten worse with every subsequent generation. Now – our generation stands at the brink of the abyss. Now – our generation cannot simply pass along the problem because the system is collapsing. We – you and me – must now face the music for all of the sins of past generations.
We have been given the responsibility to find a way out of this mess. Can we do it alone? Can we take on the world and it’s deception by ourselves and somehow find a way to succeed against what appears to be insurmountable odds? We need to somehow find a monetary system that does not rely on exponential growth – that is stable and sustainable. At the same time, we must outsmart an evil spiritual being that will do everything possible to prevent our success. He will bring those he controls in the world against us at every turn. So, can we do all of this on our own? Not a chance. We only need to look at past generations and the decisions they have made to see the answer is no. Follow worldly intelligence and logic – and we will fail. I’m sure that there will seem to be many possible solutions – and all but one will lead to our destruction. There is only one way for us to succeed – God’s way.
jg – Dec 12, 2008
Households pay down debts for first time
Thursday, December 11, 2008, 4:03 pm, by cmartenson
Chris Martenson

Mayday! Mayday!

This next story outlines a dire condition for a debt-based monetary system:
WASHINGTON (MarketWatch) – Stung by the loss of $2.81 trillion in their net wealth, U.S. households paid down their debts in the third quarter for the first time since at least 1952, the Federal Reserve reported Thursday.
As of Sept. 30, households’ total outstanding debt shrank at an annual rate of 0.8% from $13.94 trillion to $13.91 trillion, the Fed said in its quarterly flow of funds report. It’s the first decline in household debt ever recorded in the report.
Consumer debt actually reversed. This strange behavior has never before been observed in this data series and it goes back to 1952.
Whether we use an “outside-in” empirical approach to observe that debt and money have been created in exponential amounts over the past six decades, or an “inside-out” approach to demonstrate a mathematical requirement for the exponential creation of money/debt, we come to the same conclusion: We live in an exponential money system.
For this reason, the failure of consumer debt to expand at the required rate is very big news. What’s “the required rate”? Roughly the aggregate rate of interest on all outstanding debts.
It seems that the hit came from the first ever recorded drop in mortgage debt:
Households paid off more mortgage debt than they took on for the first time on record. Mortgage debt fell at a 2.4% annual rate to $10.54 trillion. Other consumer debts, such as credit cards and auto loans, increased at a 1.2% annual rate in the quarter to $2.6 trillion.
I am not certain if the mortgages were paid down or defaulted upon, but the article implies that they were paid down. I am less sure of that given the massive foreclosure rates that are plastered all over the news.
Given that consumers are not pulling their weight, how is the system being held together? Readers of the last two Martenson Reports will not be surprised by the answer:
Total U.S. domestic nonfinancial debt increased at a 7.2% annual rate, boosted by a postwar record 39.2% increase in debt taken on by the federal government.
You can try and understand all the confusing alphabet soup lending facilities offered by the Fed, and try to track details of all the new borrowing by the government, but it is all really very simple to understand if we back up a bit.
New borrowing and lending is being undertaken by the Fed-government axis at a rate sufficient to equal all the outstanding interest payments on prior debts.
Without this new money creation defaults by somebody somewhere in the system is guaranteed.
Compounding the difficulties of the monetary and fiscal authorities is the fact that debts are already defaulting at a horrific clip.
All in all this leads me to conclude that when it comes to borrowing and new money creation, we haven’t seen anything yet.
And still, even in the face of overwhelming evidence that there is an illness that lurks within the very design of the money system itself, there is precious little commentary on that subject in main stream media or the dominant political parties.
It’s time to change that.
DECEMBER 12, 2008
Debt Shows First Drop as Slump Squeezes Consumers
Wall St. Journal
The U.S. economy is deteriorating more rapidly than expected just weeks ago, indicating the recession will be deeper and longer than feared as households and businesses struggle with the most stress they have faced in decades.
New Federal Reserve data revealed that U.S. households paid down debt for the first time since the central bank started collecting the information in 1952. While a positive longer-term trend, the higher savings rate means that consumers are spending less. That is a punishing turn for an economy in which consumer spending accounts for 70% of gross domestic product.
The Commerce Department said exports, which had helped sustain the economy through midyear, fell 2.2% in October from a month earlier as foreign demand for U.S. goods continued to fall. The nation’s trade deficit rose in October to $57.2 billion from $56.6 billion in September, despite a considerable drop in oil prices during the month.

WSJ’s Phil Izzo talks with Kelsey Hubbard about the results of the latest survey showing economists believe the current recession will last into June 2009, making it the longest since the Great Depression.

Another government report indicated that initial unemployment claims in the first week of December surged 58,000 from a week earlier to 573,000, a 26-year high, as companies slash payrolls before the end of the year. The number of workers continuing to collect jobless benefits jumped 338,000 to 4.43 million in the week ending Nov. 29 from the prior week — matching the largest weekly increase on record, in November 1974 — with little relief in sight as businesses brace for a lengthy downturn.
The government data spurred forecasters to update their expectations for the depth of the contraction, which is now expected to continue through the first half of next year. The increasingly grim news is likely to give a push to President-elect Barack Obama’s plans for massive government spending to jolt the economy.
Citing the weak trade figures and other signs of a business slowdown, the forecasting firm Macroeconomic Advisers downgraded its estimate of GDP in the current quarter by a full percentage point on Thursday, to a 6.6% annualized decline. If that comes to pass, the quarter would rival the two worst periods in the recessions of the early 1980s. The economy declined by 7.8% in the second quarter of 1980 and 6.4% in the first quarter of 1982.
The final GDP number could turn out to be less dire, of course. Some economic consulting firms continue to estimate a slightly smaller 5% GDP decline this quarter followed by a 4% contraction in the first three months of next year.
Economists in the latest Wall Street Journal forecasting survey projected, on average, that the decline in GDP, which started in July, would continue through the first two quarters of 2009. If those predictions bear out, it would mark the first time GDP has contracted in four consecutive quarters during the postwar period.
On average, economists expect June 2009 to mark the end of the recession, which began in December 2007. That would put the downturn at 18 months, the longest period of decline since the Great Depression. The recessions of 1973-75 and 1981-82 each lasted 16 months.
The 54 economists in the latest Wall Street Journal survey predicted, on average, that GDP would contract at an annual rate of 4.3% in the fourth quarter of 2008, and 2.5% and 0.5% in the first two quarters of 2009. The Commerce Department’s preliminary estimate showed a 0.5% decline in quarterly GDP for the third quarter of 2008. The economists were surveyed Dec. 5-8.
The expansion of the U.S. trade gap in October came as the plunging cost of oil imports was more than offset by a surge in the volume of oil that was imported. September’s hurricanes, which disrupted activities at the port of Houston, partly caused the October import surge.
Exports of goods and services fell to $151.7 billion in October from $155.1 billion the prior month, as trading partners felt the effects of the worsening slowdown — and a strengthening U.S. dollar. Total imports edged down to $208.9 billion from $211.6 billion, largely because of the drop in oil prices.
The broad-based decline in exports showed how a key engine of GDP growth earlier this year is sputtering. Trade represented as much as 2.9 percentage points of GDP growth in the second quarter, and 1.1 percentage points of growth in the third.
Through much of the first half of 2008, “the only thing that was keeping the economy from technically showing a reduction in GDP was trade,” said IHS Global Insight economist Brian Bethune. “Even though we saw weak growth, it was strong enough to more or less keep factories busy and help absorb the shock of a weak domestic economy.”
Now, “there’s probably going to be little or no contribution from those exports,” Mr. Bethune said.
The financial turmoil over the past year has taken a deep toll on consumers and businesses. The Federal Reserve said Thursday that U.S. household net worth fell 4.7% to $56.5 trillion in the third quarter, marking the fourth-straight quarterly decline, as home values, stocks and other assets lost value. Household net worth was down 11% from a year earlier.

The Fed’s quarterly flow-of-funds report, the most comprehensive snapshot of the household sector available, showed that household debt contracted at a 0.8% rate, the first drop on record. Growth in consumer credit slowed to 1.2% at an annual rate in the July-September period, the Fed said, far lower than the 3.9% pace in the prior quarter. Borrowing for home mortgages fell at a 2.4% annual rate, the largest decline since the Fed began keeping the figure.
Consumers are being hit by falling home prices and job losses. The economists in the Journal survey on average said the unemployment rate will peak at 8.4% next year. While that rate was surpassed in both the 1970s and 1980s, it would mark a four-percentage-point increase from the low of 4.4% in March 2007. Only the 1973-75 recession, with a 4.1 percentage-point increase, had a larger jump in the postwar period.
Adding to consumers’ pain: The end of the recession isn’t likely to mark the end of job losses. In past recessions, labor-market contraction has continued for months after a downturn’s official end. The economists surveyed, on average, forecast just an 8.1% rate for December 2009 as job cuts continue into 2010.
“The job market is ugly and is going to stay that way,” said Allen Sinai at Decision Economics. “The economy is going through the heart of reductions in the work force now.”
Many economists in the Wall Street Journal poll cited a major expected fiscal stimulus package as the key to pulling the U.S. out of recession, even though the structure of the package remains uncertain.
Write to Phil Izzo at, Brenda Cronin at and Sudeep Reddy at

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