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Notes to myself, possibly of interest to others.
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Monday, August 23, 2010

Stephanie Pomboy - No end in sight

In her latest MacroMavens commentary, Stephanie Pomboy, with her trademark spice and flourish, zeroes in on the greatest impediment to the consumer resuming his free-spending ways, namely his towering debt—which we deliberately neglected to include in our little riff on consumer spending, so as to give Stephanie an open field. (Who said journalists have no manners?)

There's no way, she says firmly, that households can seriously deleverage overnight. The task is truly humongous: To return to those halcyon pre-Greenspan days when the ratio of debt to income was about 65% would require, she reckons, debt to decline by $6.3 trillion (or, just as daunting, income to increase by $9 trillion).

That would mean a massive reduction in spending, year in, year out, spread over six to 10 years. But, she sighs, there's virtually zero chance of that happening, if only because the bottom 40% of households spend every last dollar they make—and then some—just to keep their heads above water.

Of the $14 trillion in household debt, she notes, $10.5 trillion is mortgage-related. And, as Stephanie puts it, since stiffing your banker is now "socially acceptable, deleveraging needn't entail the pesky inconvenience of foregoing consumption," and she predicts more homeowners will exploit this opportunity "to accelerate balance-sheet repair."

It's an open question, she feels, as to how much of the burden will be borne by banks (via rising delinquencies) versus the economy (via reduced spending). What is clear is that the low end of the income scale, with transfer payments such as unemployment benefits drying up and credit exceedingly tough to come by, already is feeling the hit.

Stephanie also discerns considerable distress among consumers generally in the astonishing decline in bank deposits, clear evidence they're starting to burn through cash.

Little wonder she remains anything but bullish on the economy or the stock market.
---via Alan Ableson, Barrons, 7/10

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