Saving more or going under?

Saving is the difference between income and spending. Here at Demand Side, we point out that paying down debt is then part of saving, even though there is no comfort in the savings account. Another way to reduce debt is to not pay it down, but not pay it at all, and have the bank or lender accept the fact and write the debt off. That is what happens in foreclosure, the lender realizes the debt will not be repaid. That is what happens in credit card write-offs. And it is happening to a greater and greater degree. This is the disorganized way of dealing with private household debt. We expect it to be very messy for years to come. Here's a description of the current size, with chart, from the NYT's Floyd Norris.

Off the Charts
Americans Owe Less. That’s Not All Good.

By FLOYD NORRIS
Published: December 11, 2009
New York Times

AMERICAN consumers owe less now than they did a year ago. Before the current financial crisis, that would have been unthinkable.

Figures released this week by the Federal Reserve showed that Americans owed $10.8 trillion on home mortgages at the end of the third quarter, down 2.2 percent from a year earlier and the lowest level since mid-2007.

Similarly, the Fed said that outstanding credit card bills in October totaled $888 billion, down 8.5 percent from a year earlier. That number was the lowest since March 2007.

Those trends do not, however, necessarily indicate that Americans have paid down their debts and are starting to lead the more frugal lives that some financial planners have been recommending for years. There has undoubtedly been some of that, but the declines also indicate that banks have been forced to write off a lot of bad debts and have grown more stingy in granting credit.

As can be seen from the accompanying charts, banks’ credit card write-offs have soared, to an annual rate of 10.2 percent in the third quarter of this year.

And the Mortgage Bankers Association reported that at the end of the third quarter, 4.5 percent of all mortgages were in foreclosure — one in 22 mortgages. It said another 6.1 percent — one in 16 — were at least two months overdue. Those figures are for all mortgages, not just subprime ones.

The extent to which Americans are really cutting back may become clearer this holiday shopping season, when they decide how much money to spend. If what they tell pollsters can be trusted, they are going to cut back.

A poll of 7,500 Americans in November, conducted for Alix Partners, a business consulting firm, found that people expected to save 15 percent of their income when the recession ended. That is about three times the current savings rate, as reflected in government figures. Asked what their largest personal financial concern was, 18 percent cited lowering their debt, more than any other choice.

Spending for some people will be down simply because they now have less credit available. As a group, Americans still have access to trillions of dollars, but the numbers have declined as banks have reduced or eliminated credit lines to many customers.

Banks, as a group, reported $3.4 trillion in unused credit card lines at the end of September, according to a compilation by Foresight Analytics of bank reports to the Federal Deposit Insurance Corporation. That was down 28 percent from the peak of $4.7 billion reached in mid-2008.

The banks reported that outstanding home equity loans were down only 1 percent from the peak, to $667 billion. But unused home equity lines of credit came to $539 billion, the lowest since 2005 and down 25 percent from the peak reached at the end of 2007.