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To: mishedlo who wrote (116437)	8/9/2001 10:37:29 PM
From: patron_anejo_por_favor	Respond to of 436258

Kasriel with an interesting take on why consumer debt dropped last month: northerntrust.com United States Daily Economic Commentary Consumer Credit Fell in June - Is It a Case of +15% vs. -15%? August 08, 2001 The monthly consumer credit numbers are notorious for being violently revised, so we have to approach the report that consumer credit actually fell in June by $1.5 bln. with some skepticism. But is there any reason why consumer credit growth might, at least, being slowing down? Yes. Why? A positive 15% return on your money compared to a negative 15% return. Come again. Check out the chart below. The annual interest rate on credit card debt is almost 15%. The year-of-year total return on the S&P 500 in the second quarter was almost negative 15%. Granted, today's return on equities tells you nothing about tomorrow's. But that didn't stop a lot of people in 1997-1999 from borrowing at 15% to pay for their groceries so that they could buy stocks that surely would keep generating annual returns of 20% to 40%. In contrast, today, folks might be paying cash for their groceries, paying off some of their consumer debt and not bidding for stocks. Another factor that could account for the slowdown in consumer credit growth is mortgage refinancing. Again, rather than borrowing the equity in your house at, say, 7-3/4%, to buy stocks yielding 20%+, why not borrow at 7-3/4% to pay off debt costing you 15%? And finally, when you declare bankruptcy, which folks have been doing in droves so far this year (see second chart below), I suppose your consumer debt vaporizes from the books, along with the earnings of your former creditor. To the degree that households are in the process of deleveraging, further downward pressure on interest rates could occur. Paying down your debt is the equivalent of increasing your saving. An autonomous increase in saving implies lower interest rates. Does it imply slower economic growth? Not necessarily. As interest rates decline, entrepreneurs will find it attractive to borrow funds to use in starting new businesses or expanding old ones. The fly in the ointment would be, as usual, the most important price-fixer in the world, the Fed. If the Fed prevents interest rates from falling to their new presumed lower equilibrium levels by not adjusting its funds rate target sufficiently, we will observe two things. First, the yield curve will flatten. Second, growth the broad monetary aggregates will slow down. I'm watching. Beige Book Reiterates What We Already Know Let's face it. It was a slow news day. Why else would I be writing about consumer credit? Thank goodness for yesterday's consumer credit, otherwise I would have been left with wholesale inventories! On a slow news day, traders can get excited about things they otherwise would not have. The stock market seemed to sell off and the bond market seemed to catch a bid after the latest installment of the Fed's Beige Book was released. It said that with the exception of residential real estate, things were pretty stagnant to declining across the US. Didn't we already know this? Didn't the July Manufacturing NAPM report tell us that the factory sector had not yet turned around? Didn't the July Non-Manufacturing NAPM report tell us that things weren't great in the service sector either? Weren't the probabilities very high that the Fed would by 25 b.p. on August 21 before today's Beige Book was released? Like I said, it was a slow news day. Paul L. Kasriel Director of Economic Research