Debt and its Discontents

Lots of Bulls — and quite a few commenters here — agree there is a worldwide boom going on. What is fueling it, you may ask? Organic growth? Government stimulus? Innovation? An expanding economy? China?

Well, all of that contributes. These items have had an impact. But the biggest factor by far, according to MacroMavens‘ Stephanie Pomboy, is, in a word, Debt:

IT ISN’T MONEY OR LOVE THAT MAKES the world go ’round — it’s debt. That’s certainly true of this blessed land of ours. At last count, Uncle Sam was in hock to the tune of $4 trillion or so, and every day the big fellow borrows a ton more. According to Goldman Sachs, the U.S. private sector, not to be outdone, in the first three quarters of this year has been borrowing like mad as well and runs a financial deficit of 4% of GDP, second only to 2000’s peak 5½% shortfall.

Debt and its discontents also happens to be the theme of Stephanie Pomboy’s latest MacroMavens commentary. But her focus, while large in potential import for the economy, the markets and the legions of poor souls who have borrowed neither wisely nor well, is more specific and provides insight into how the consumer has managed to keep bubbling along without the easy access to cash and credit his house provided.

Pure and simple, as a source of funds, Jane and John Q., with the well gone dry on the home equity front, have turned to plastic. They’ve also increasingly frequented other such usurious lenders as pawnshops, check cashers and that ilk — which she dubs payday lenders — where customers typically pay $793 for a $325 loan.

Stephanie reports that while home-equity loans have dwindled to a mere sliver of their former bulge, credit-card borrowing has been zooming, accounting or 47% of the increase in total consumer credit.

As to the payday lenders, they’re enjoying a truly big payday: Their 33,000 storefronts exceed in number the outlets of McDonald’s, Burger King and Wendy’s combined.

The top five payday lenders — America Cash Advance, Cash America, Dollar Financial, EZCORP and ACE Cash — do an aggregate $2.3 billion in revenues; that’s 50% more than they did a scant three years ago. Stephanie muses, though, that perhaps business is too good and "it’s just a matter of time before their embarrassment of riches attracts the attention of the regulators."

As for the credit-card lenders, she predicts that it’s just a matter of time, too, before what has laid the subprime lenders low affects them. "It’s a little thing," she explains, "known as ‘adverse selection,’ " of borrowers. The irony is that while "their home-equity lending counterparts are beginning to turn down risky borrowers, the credit-card companies are rolling out the red carpet for them."

At this point, Stephanie suggests, investors might do worse than to short, and certainly underweight, the stocks of credit-card outfits, while going long subprime lenders; short the shares of regional banks and mortgage brokers and go long or add to positions in Fannie Mae, which regulators, by restricting its lending capacity, have predictably impaired housing liquidity in general when housing needs it most, but lessened Fannie’s own vulnerability to the shakeout in mortgage credit.

If you are curious about Macromaven’s chief economist, there was a good interview with Stephanie last year in Barron’s — you can see it at the Macromaven site here.



Mahmoud the Ladies Man
Barron’s DECEMBER 18, 2006 

Handling the Truth
Jennifer Ablan
Barron’s February 7, 2005

Print Friendly, PDF & Email

What's been said:

Discussions found on the web:
  1. Barry Ritholtz commented on Dec 16

    Any thought on the grayscale (versus the blue) for the indented paragraphs?

  2. bodanker commented on Dec 16

    I find the blue slightly easier to read. Plus, it’s not as depressing as the gray. :P

  3. ilsm commented on Dec 16

    Where does GS get $4T/ What year 1997?

    Last I saw Uncle Sam was in hock to the tune of $8.6T. And rising!

    Last year I reviewed, 2005, seemed that it was $7.9T: 1.8T “owed” to social security trust fund, another 1.5T borrowed from other federal infrastructure accounts not spent on infrastructure, and .79T held by the federal reserve.

    The rest almost 4T is what the treasury actually pays cash interest for.

    The government held debt does not get cash interest although the SS trustees do add interest to their “assets” each year.

    Who is understating the debt and we privatize SS and that debt begins to get cash interest?

    Where would interests rates go if the treasury paid cash interest to the intragovernment accounts?

    I think all intragovernment asset accounts should invest in Wall Street. HUHHHHH

  4. zell commented on Dec 16

    BR: Don’t get suckered in to that playground name calling that dominated an earlier post. Better to be safe than sorry. What took place 00-03 was breataking but not suffocating like the 70’s when it seemed like the bear already killed the bull and was just dragging it around by the neck for exercise.
    We are experiencing runaway debt expansion. The expansion part is like nitrous oxide, like popcorn in the microwave. Starts out as corn, pops when done correctly, but turns to a cinder when the expansionary phase turns contractionary because the substance could not handle the ammount of energy applied to it. The burnt cinders sit there and stink for a long time and the liquidity queens are into selling pencils.
    Sorry for the lengthy analogies.

  5. ~ Nona commented on Dec 16

    FWIW, I prefer the blue.

  6. D. commented on Dec 16

    What are you talking about? The problem isn’t too much debt, it’s that we’re not taking on enough debt!!!

    What they fail to notice is that if you keep on lending and printing money without being productive, inflation will catch up. Right now we’re ok because other parts of the world are productive!

    Currently in North America, net worth growth has mostly come from real estate appreciation, thus benefiting the older generation who actually owns the assets. For Boomers to benefit from this asset appreciation in future years, Gen-X will need to get richer and to become more productive. Ironically, the environment is not set up for this and the retirees could have all the money in the world but if the younger generation is not producing enough, their dollars won’t be worth very much. As people get older they consume less material stuff and more servcices. Importing services might not be the best solution!

    If you look at most of history’s financial collapses, each one was triggered by the repackaging of debt as their financial innovators were admired. Have you noticed the proliferation of esoteric structured products in the last little while?

    In this fast paced world of instant messeging and gratification, I don’t think it’ll take 100 years for the Ponzi scheme to play out.

  7. paul commented on Dec 16

    I like the blue, but it made it difficult to pick up links embedded in the text because they showed almost the smae color. The linkfest was especially difficult to navigate.

    Some blogs put the blockquotes in a shaded box with a contrasting font color. Maybe that’s a way to go?

  8. Zephyr commented on Dec 16


    I think the use of an indented shaded box with the text in black works really well. This enables the links to be easily seen in blue.

    Your blog is great.

  9. DavidB commented on Dec 16

    The gray was the first thing I noticed and I thought, “I hope he hasn’t changed his colors.”

    The problem with the gray is that you can’t fix it much by enlarging the fonts. At least with the other colors you hit a high contrasting boldness in the fonts at some point but the contrast doesn’t get very high with the gray.

    If you are worried about the links you can always have them underlined. I still don’t know why the industry gravitated away from that. It makes it much harder to notice links now

    Now back to reading what you posted

  10. Quiddity commented on Dec 16

    I’m okay with the gray.

  11. Troy commented on Dec 16

    I don’t think it’ll take 100 years for the Ponzi scheme to play out.

    Thing is, all this wealth will trickle down, via Boomer spending and then inheritance, to Gens X & Y. Not to be ghoulish, but I’ve got California property bought in 1980 coming to me in the next 20-odd years.

  12. D. commented on Dec 17

    “Thing is, all this wealth will trickle down, via Boomer spending and then inheritance, to Gens X & Y. Not to be ghoulish, but I’ve got California property bought in 1980 coming to me in the next 20-odd years.”

    You can’t compare California to most everywhere else.

    If rates go up, some of this wealth will disappear.

    If rates stay low, it’ll be hard to cut rates every time we want to stimulate the economy so times will be rockier than they’ve been in the last 20 years.

    Most boomers don’t have enough to retire so many will probably reverse mortgage or refi. Many Gen-X will be inheriting debt.

  13. Bob Giddings commented on Dec 18

    Fact is, there’s been a war on between central banks, and since they all can print money, we small bait are apt to get crushed in the struggle. The Fed controls our short term rates, and the Asian banks control OUR long term rates, which they set by buying our long and medium term debt without care or caution. As I said, all these guys print money. Now they seem to be buying our equities without much limit, too.

    You like charts? Get a load of these in Minyanville today:

    But hey, whatcha gonna do?

    Bob G.

Posted Under