Doing More With Less -- America's Road to Another Crisis

"Insanity is doing the same thing over and over again and expecting different results."
-- Albert Einstein

I can pretty much say without question that Americans are insane. Either that or we have the attention span of a goldfish.

I'd like to think that we take the lessons we've learned from previous recessions and utilize that knowledge so we don't fall into the same problems again. That's what I'd like to think...but that's not exactly how the world works.

According to data released this week, consumer borrowing jumped dramatically for the second straight month. Figures from the Federal Reserve noted a $19.3 billion jump in December, which followed an even larger $20.4 billion rise in November. A rise around Christmas isn't all that unique, but the magnitude of the increase is huge -- the two largest monthly increases in a decade.

Source: Federal Reserve.

Christmas-induced credit debt increased by $2.8 billion -- again, more or less expected. The real shock was the $16.6 billion increase in auto and student loans. Apparently historically high unemployment rates aren't enough to scare people off from purchasing a new vehicle. In fact, a poor job market appears to be influencing people to go back to school now more than ever.

What's alarming is that borrowing rates are rising again and are nearly back to their pre-recession levels, yet consumer wages haven't kept pace with inflation even at its depressed levels. Take a look at this side-by-side comparison to see why I'm so concerned:


Average Hourly Earnings Percentage Increase

Annual Inflation Rate

2007 3.26% 2.85%
2008 3.53% 3.85%
2009 1.82% (0.34%)
2010 1.70% 1.64%
2011 2.06%* 3.16%

Source: Bureau of Labor Statistics, *Preliminary figure from BLS.

Higher levels of spending could denote consumer confidence in a rebounding economy. Then again, I'm more inclined to believe consumers simply didn't learn their lesson and are trying to do more with money they simply don't have. Federal Reserve Chairman Ben Bernanke has to take this rise in consumer borrowing as bittersweet; consumer spending drives 70% of all economic activity, yet consumer debt is a large reason why we dipped into recession in the first place. It's the catch-22 to end all catch-22's.

Of greater concern are the still-high levels of consumer delinquency rates. You would think that historically low lending rates would facilitate the restructuring of loans and prevent high levels of delinquencies, but the tightness of banks to lend and restructure has, for lack of a better word, mucked everything up. Take a look at residential mortgage delinquency data and you'll understand why I don't think we're out of the woods just yet.

Source: Federal Reserve.

As you can see, delinquency rates are declining, but at a very slow pace. Many of our nation's largest financial institutions are still dealing with the repercussions of consumers' poor borrowing habits (and to some extent banks' poor lending habits). Bank of America (NYSE: BAC  ) has yet to completely put its Countrywide Financial mortgage fiasco completely behind it. Just last week New York Attorney General Eric Schneiderman filed a lawsuit against Bank of America, as well as JPMorgan Chase (NYSE: JPM  ) and Wells Fargo (NYSE: WFC  ) for using an electronic mortgage database that allegedly resulted in deceptive and illegal practices. Don't be fooled by yesterday's $25 billion settlement on foreclosures. It's quite possible U.S. financial institutions will be dealing with mortgage lawsuits for the better part of a decade before everything is all said and done.

All of this would be a moot point if Americans were saving money. But if that were the case I wouldn't be writing this article now would I?

Source: U.S. Department of Commerce, Bureau of Economic Analysis via St. Louis Federal Reserve.

Not only have personal savings been more or less heading lower for the past 30 years, but the November reading from the St. Louis Federal Reserve notched the lowest level of personal saving since December 2007. The catch-22 of exceptionally low lending rates is they do little to entice consumers to put their money to work in traditional money-making safety nets like savings accounts and bank CDs.

Fool colleague Morgan Housel painted a different picture last week after the January jobs report crushed Wall Street's expectations. The figures he alludes to do indeed point to the early stages of a recovery. The question I have is: Do the figures I have here point to the beginning stages of one final recessionary dip? If inflation keeps outpacing wages and borrowing continues to rise, I see it as inevitable.

What do you think? Let your fellow Fools know using the comments box below.

Fool contributor Sean Williams owns shares of Bank of America, but has no material interest in any other companies mentioned in this article. He saved more last year than ever before. You can follow him on CAPS under the screen name TMFUltraLong, track every pick he makes under the screen name TrackUltraLong, and check him out on Twitter, where he goes by the handle @TMFUltraLong. The Motley Fool owns shares of Bank of America, JPMorgan Chase, and Wells Fargo, as well as a covered strangle position on Wells Fargo. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy that's always looking out for its readers.

Read/Post Comments (17) | Recommend This Article (24)

Comments from our Foolish Readers

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  • Report this Comment On February 10, 2012, at 11:39 AM, DJDynamicNC wrote:

    To quote the article you linked to:

    "Since 2008, mortgage debt has declined by about $1 trillion. Credit card debt has dropped by $180 billion. Household debt payments as a percentage of income are now at the lowest level in 18 years. Even when government debt is taken into account, the economy's total debt-to-GDP ratio has been declining for four years, and faster than nearly any other developed nation on Earth."

    I have a question about that first graph you posted - am I reading that right? It suggests that we are just over 2.5 million units, and claims that those units are billion of dollars. Is that right? Consumer debt of 2,500,000,000,000,000, or 2.5 quadrillion dollars, sounds inaccurate.

  • Report this Comment On February 10, 2012, at 1:31 PM, PlanckB wrote:

    America's economy is insane. It is totally dependent on debt for consumption and always has been since it all began in the 1920s, and then again steadily building since the 1950s. Of course, after the hollowing out of the productive economy began in the 1980s with the move to speculative economics, debt became an even bigger engine behind the "animal spirits" of the whole thing. The PACs ensure the Pols vote for the banks to let them play with insured deposits for their trading. Going back to school to get new skills is exactly what the Supply-Siders say is needed to rebuild the economy. They claim unemployment is because of the wrong skills. They always blame the people instead of the over-concentrated capital in the hands of too few that is focused more more and more easy money speculation all over the world. That and natural resources plays, even if it takes a war (which the people pay for with regressive taxation, not the Family Offices who really benefit from it all paying only 15% on capital gains).

  • Report this Comment On February 10, 2012, at 4:10 PM, TMFLomax wrote:

    Good piece, Sean! I think a lot of lessons that should have been learned HAVE gotten lost or forgotten. Not good at all.


  • Report this Comment On February 10, 2012, at 4:35 PM, TMFUltraLong wrote:


    That figure should read $2.5 trillion. Excel and I are no longer friends....


  • Report this Comment On February 10, 2012, at 4:57 PM, Foosballking wrote:

    @truthisnstupid - you ought to run for "Red Herring - in - Chief"

  • Report this Comment On February 10, 2012, at 6:27 PM, armycommando wrote:

    As a 99er fool, I expect America,Europe,and Japan to continue to keep growing fueled by higher debt public and private at the expense of developing nations. The beta will be higher in every future market crash and wall street bonuses will climb higher and higher. China and India are called emerging markets as a nice way of sugar-coating who they truly are. They are modern day slaves being exploited by multi-corporations making things cheap enough for grandma Mary who is living on social security.

  • Report this Comment On February 10, 2012, at 6:30 PM, armycommando wrote:

    As a 99er fool, I expect America,Europe,and Japan to continue to keep growing fueled by higher debt public and private at the expense of developing nations. The beta will be higher in every future market crash and wall street bonuses will climb higher and higher. China and India are called emerging markets as a nice way of sugar-coating who they truly are. They are modern day slaves being exploited by multi-corporations making things cheap enough for grandma Mary who is living on social security.

  • Report this Comment On February 10, 2012, at 6:40 PM, outoffocus wrote:

    What lesson is there to learn? Bernanke has made it so that prudent financial management is the wrong thing to do. Interest rates on savings are at record lows and so are borrowing rates. The stock market has gone from a place to invest for the future to a huge gambling casino. I think your odds are better at vegas. If you are prudent you are punished with high inflation. If you are reckless you are rewarded with bailouts, debt rightoffs, and simply walking away. I see no lesson to learn here....

  • Report this Comment On February 10, 2012, at 11:10 PM, Tomohawk52 wrote:

    I am not sure that people didn't learn a lesson from what happened back at the beginning of the Great Recession. They learned that playing by the rules was for suckers and that swinging for the fences wasn't dangerous if the government intervened when you struck out. Personally I sort of subscribe to Max Keiser's "Casino Gulag" view of American (and Canadian) life. :-)

  • Report this Comment On February 11, 2012, at 1:08 PM, 48ozhalfgallons wrote:

    Thank you, Truth, for your accurate observation. I believe the US is being undermined to fulfill a world order agenda. The following is an observation of Keynes concerning the effects of inflationism. This is from Wikipedia:

    In political debate, inflationism is opposed to hard currency, which believes that the real value of currency should be maintained.

    In late 19th century United States, the Free Silver movement advocated the inflationary policy of free coinage of silver. This was a contentious political issue in the 40-year period 1873–1913, consistently defeated. Later, economist John Maynard Keynes described the effects of inflationism:

    Lenin is said to have declared that the best way to destroy the capitalist system was to debauch the currency. By a continuing process of inflation, governments can confiscate, secretly and unobserved, an important part of the wealth of their citizens. By this method they not only confiscate, but they confiscate arbitrarily; and, while the process impoverishes many, it actually enriches some. The sight of this arbitrary rearrangement of riches strikes not only at security but [also] at confidence in the equity of the existing distribution of wealth. Those to whom the system brings windfalls, beyond their deserts and even beyond their expectations or desires, become "profiteers," who are the object of the hatred of the bourgeoisie, whom the inflationism has impoverished, not less than of the proletariat. As the inflation proceeds and the real value of the currency fluctuates wildly from month to month, all permanent relations between debtors and creditors, which form the ultimate foundation of capitalism, become so utterly disordered as to be almost meaningless; and the process of wealth-getting degenerates into a gamble and a lottery. Lenin was certainly right. There is no subtler, no surer means of overturning the existing basis of society than to debauch the currency. The process engages all the hidden forces of economic law on the side of destruction, and does it in a manner which not one man in a million is able to diagnose.

    To ignore the current symptoms observed today is tantamount to denying our own senses.

  • Report this Comment On February 11, 2012, at 1:23 PM, DAG_Investments wrote:

    This is an excellent article, thank you. With that said, while the concerns expressed are clearly valid and need to be watched closely, I also believe that there are some important considerations missing in the conclusions. As imminent significant downturn approached and arrived, there were also many who didn't go underwater on homes and other credit spending that they couldn't afford in the first place. Many did just the opposite - buckled down and sat on the sidelines watching the chaos. They may not be the majority, but perhaps there are enough out there to move the numbers in ways that seem to imply that we are collectively repeating the same pre-recession excesses. Perhaps, that minority is beginning to counter the vocal majority with pent-up spending/investment. As just one small example, my wife and I bought two new cars in January 2011. Not because we're unconcerned about unemployment trends and debt levels, but precisely because we are. We must have cars to keep or get jobs and a $300/month car note is much easier to make during hard times than a $600 note. Between continually rising gas prices, relative inefficiency of older cars, repair costs, insurance savings and historically low interest rates; we're actually saving far, far more than we're spending by buying two new cars. For example, the combined monthly gas savings alone from both new cars pays almost the entire monthly note for one of the cars. When all the other efficiencies mentioned are factored in, the money we're saving/making from the new cars has padded our bank account nicely should we encounter another recession soon (which I don't believe we will... unless we talk ourselves into it). I'm also seriously considering additional education or re-educating myself. Again, not because we're unconcerned about unemployment trends and debt levels. Rather, because the new normal for unemployment levels is one of several things clearly indicating that the relatively short-term risk/sacrifice to invest in education is increasingly a requirement for long-term survival in the workforce. In other words, a bachelor's degree today has the value that a high school diploma did during my father's generation and it seems clear that trend continues. Perhaps both younger generations and experienced workers, who can't find jobs right now anyway, recognize that and are gambling on their futures with education borrowing/investment- not the worst game in town.

  • Report this Comment On February 11, 2012, at 3:34 PM, MatiasR wrote:

    I think you raise a valid concern but are missing one of the main credit growth and savings rate decline drivers, and that's the Fed's and other central banks' intervention in markets. Driving up lending and consumption (hence lower savings) is precisely what the Fed has been trying to do with the zero interest rate policy, QE 1, 2 and 2.5. So if you want to draw a conclusion, if any, it's that they are accomplishing their mission. If we are to expect consumers to learn everything from past mistakes and not be enticed by low rates, the Fed's policy actions are basically useless.

  • Report this Comment On February 11, 2012, at 5:28 PM, 48ozhalfgallons wrote:

    The insidious notion that interest rates are low! Completely absurd and profoundly predatory when considering the naivety of those who persist in believing that borrowing money will lead to savings presuming upon an uncertain future.

    Lets consider not the interest rate but rather the margin of profit banks are realizing in today's irrational financial environment.

    Last time we saw 4.5% interest on a 30 year mortgage was the late 50's. A pass book savings account returned 4%, the discount rate was 2.5%, real inflation was 1.5%, and unemployment 4%.

    Car loans ran about 5-6%. So banks were realizing 80% on home mortgages up to 240% on car loans with a discount rate basis of 2.5%.

    1979: Home mortgage rates varied from 8-12%. Discount rate was 6% and consumer credit was as high as 21%. Passbook savings varied from 6-8%. Real inflation was 10-12%, and real unemployment was 8%. Using the discount rate of that time, bank profit ranged between 40% on home mortgages up to 350% for consumer loans.

    Today: Home mortgage rates 3.5% to 4.5% (if you can get one); consumer rates 5.5-6.5%. Pass book rates .1-.9%; real inflation (anything below 12% is a lie) Unemployment 8.3% (also a lie); discount rate is 0%. Because dividing by 0 is meaningless, .1% is a reasonable value to use for a discount rate basis. Banks are profiting 3500-6500% over what they pay the fed in today's insane loan market.

    Numerous graphs illustrate that real wages have been declining for 30 years. The 50's model was during an era of rising wages. The idiocy that interest today is cheap coupled with the presumption that the value of one's future labor will surely rise motivating one to borrow for a depreciating asset in a decreasing wage market.

    Lenin will gladly loan you all the money you want.

  • Report this Comment On February 11, 2012, at 6:18 PM, borneofan wrote:

    My first concern is a credibility issue with gubmint data. As long as COLA is driven by gubmint stats, they have a powerful financial motive to fudge the numbers. Added to electoral pressures associated with a few hundred people directing $4 trillion and the truth disappears. What does shadow government stats say?

    The current crisis will not pass until a vast majority of the defaults and bankruptcies are behind us. It has been 4 years and Freddie/Fannie are unaltered by congress. Unless a Ron Paul presidency happens, I expect a delayed day of reckoning, perhaps till 2020 or so.

    Inflation will slowly eat away at the country as the US continues to slide down the world rankings and the empire rots from within.

    When defense, subsidies, and block grants are slashed, change will begin. Till then....

  • Report this Comment On February 12, 2012, at 11:07 AM, jrj90620 wrote:

    Buying stuff is America's major drug.Americans stopped buying so much,after the 2008 meltdown and got major withdrawal symptoms.They are now buying to satisfy the urge.Doesn't have that much to do with their finances.Govt keeps encouraging them to spend,as their patriotic duty,to save the nation's economy.I don't know how we transition from a country of too much spending and too little production.I guess that's a problem worldwide,such as Greece overspending to buy goods from Germany,who underspends and overproduces.

  • Report this Comment On February 12, 2012, at 12:49 PM, exileonmainst wrote:

    What people ought to be doing: saving their money, paying down debt, carefully evaluating what they do spend their money on, vote actively for their own economic interests and thinking ahead 20 years.

    What people are actually doing: still spending money they don't have, supporting politicians who do not represent their economic interests and telling all their 'friends' on FaceBook about it.

    I think I've discovered the path to join the 99%!

  • Report this Comment On February 14, 2012, at 10:17 AM, columnist77 wrote:

    Every American should heed this article! I am 84 and know the past better than many

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