Debt Is Again Rising to Record Levels - The Gaping Maw Returns

The average consumer is loading up again -

More American households are falling back into the debt hole, this time without the safety net of home values to help bail them out, the New York Post reported Sunday.

Last year, total US consumer debt reached its highest point in a decade, according to a credit card industry observer.

"Now more than ever, families need to work at saving and paying off any outstanding debts," said Howard Dvorkin, a certified public accountant and founder of the credit counseling service Consolidated Credit.

After a few months of reducing credit card debt levels, Dvorkin said, Americans are starting to return to their reliance on debt.

"People made some progress in reducing card debt earlier in the year, but in the last few months, as the stock market started to rise, they started to return to their old ways of charging things," he explained.

In December 2011, the total consumer debt -- which is the combination of non-revolving and revolving debt -- rose by some 9.3 percent to $2.498 trillion, according to the latest Federal Reserve Board numbers.

Both revolving debt and non-revolving debt increased. Revolving debt, which is credit-card debt, went up by 4.1 percent. Non-revolving debt, which includes loans for cars and education, rose 11.8 percent, the central bank's report said.

The trend -- month to month, quarter to quarter and year to year -- is rising steeply.

The Real Effect
We examined this moral hazard issue back in September -

Remember the talk of garbage assets back in 2008? The initial solution to that issue was essentially a dilution concept in which funds were taken from one group and spread around to "stabilize" another group. This would lead to a better 'capitalized' institution which then wouldn't 'fail'. The problem with this sort of concept is that it doesn't dilute the problem and then the issue evaporates. Rather, the aid is consumed by the troubled assets which begets more troubled assets from the inherent moral hazard. Put simply, you give a shark a meal and he'll go away for a bit, but he's coming back for more later and he will have grown exponentially.

 Looky, looky, the debt shark is back and he has a sparkly new row of teeth. How? "Non-revolving debt, which includes loans for cars and education, rose 11.8 percent..."

Education huh? Now where have I heard that before? Oh yeah, this year's predictions -

The U.S. College bubble begins to pop as longstanding institutions begin to slash their budgets to remain solvent. Some even discuss closing outright. (Start of the "education crisis".) This will be a long recovery as the perception that "education" = "money and success" will be difficult to break.

This is the inherit problem with financing anything. When you don't have to pay now, you can spend whatever you want and have to pay it back and the interest. Of course financial institutions love when you finance because it means that they get a piece of a pie they otherwise wouldn't see. Soon everyone is in on the newest 'game' as the market severely dislocates resources to pursue "profitability".  This is what occurred with the housing bubble, the tech bubble and myriads of others throughout history and is what is propping up the markets right now.

Eventually, someone realizes that they are better off not getting financing and then the rate slows. When this happens, the debt shark starts to suffocate - revenue turns down, positions get cut and liquidity tries to get out "on top". This leads to the bloody debt spiral as the market plunges into a corrective action that dries up all the unnecessary spending. (Who needs a Masters in Liberal Arts to flip burgers?)

Because of this, the debt shark is devious by nature and does not want to accept a downturn. He turns to the victims and pleads his case - 'Hey guys, remember how alive you felt when I was chasing you? We had a system going and need more of this, get back in the water!'

Some will go, some will not. It matters little though because it will not be enough. So the debt shark turns to government force to drive the people back into the water, because 'it has to be this way'. Except this time he wants us to toss our children in the water. We don't really need to go much further as you can rent any semi-decent horror movie to know how this turns out. (Hint - Usually the one guy that doesn't listen gets out alive, if he's lucky. The rest are history.)

Today, the consumer has been coaxed back into the water. He's cautious, but he so misses those awesome beach parties and the water has been cleaned up somewhat since that awful time. But what's this? Is that an arm I see floating over there? And is that a fin that I see....

Update: In case you think this isn't the case here, I present the admitted case of the UK  -

 “The British Government has run out of money because all the money was spent in the good years,” the Chancellor said. “The money and the investment and the jobs need to come from the private sector.”

That's right, the first place we saw the gaping maw...