The Myth Of U.S. De-Leveraging (XLF, FAS, SKF, FAZ, UYG, C, BAC, GS)

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January 18, 2012 1:37pm NYSE:FAS NYSE:FAZ

Jeff Nielson: Following the Crash of ’08, when the mainstream propaganda machine was desperately trying to “put a happy face” on the collapse of the U.S. economy, a ridiculous two-part economic myth was first spawned, and then regurgitated millions of times by media talking-heads: ordinary

Americans were “saving money” and “de-leveraging” (or voluntarily paying down debt). Neither half of this myth has the slightest foundation in reality.

I’ve already dealt with the first half of this myth in greater detail previously – especially in a recent commentary. Simply, the only “saving” that is being done by Americans in any significant amount is by the fat-cats at the top, who have been handing themselves the fattest pay-raises in the history of humanity over the past decade – faster than the fat-cats can possibly spend it.

This is extremely unfortunate. Given that millions of Americans had/have permanently lost their jobs, while everyone else in the bottom-80% have seen their wages plummeting lower; the massive pay-raises the fat-cats have been handing themselves represent the only new (potential) consumer dollars being generated in this economy. Thus news that the fat-cats were hoarding their money at an increased rate was 100% negative for the U.S. economy.

The other half of this mainstream myth is equally absurd fiction. From the early 1990’s until the onset of the Crash of ’08, U.S. consumer credit more than tripled – from a mere $800 billion to a peak of $2.6 trillion. Note that all of this increased debt has been piled on by Americans during a period of time when their wages has been steadily declining in real dollars, meaning that none of this increased debt is sustainable over the long-term.


As the Crash of ’08 was revealed to be (in reality) a U.S. Greater Depression, the propaganda machine was desperate to propagate the lie that individual Americans had engaged in “significant de-leveraging” while the U.S. economy was spiraling downward. As the chart below reveals, after piling on nearly $2 trillion of consumer debt, the supposed “de-leveraging” amounted to a paltry $0.2 trillion – less than 10% of the entire debt-mountain they had accumulated.

More importantly there was virtually zero “de-leveraging” – i.e. voluntarily paying down debt – in the U.S. economy. Rather, what actually took place was a spike in various categories of debt-defaults, including auto loans, credit cards, and personal bankruptcies. Debt-defaults are the involuntary destruction of debts. And while true de-leveraging (voluntarily paying down debt) is virtuous, healthy behavior in an economy, there is nothing “healthy” about a spike in debt-defaults, bankruptcies, and (of course) foreclosures.

While there was virtually zero de-leveraging during the “official recession”, Americans have shown how fast they can pile debt back on – now that U.S. financial institutions once again foolishly loosen their credit standards. Witness for the prosecution is Bloomberg, who trumpeted with glee the news that Americans had just piled on more new consumer debt in November than in any month since immediately after 9/11 – a decade earlier.

Those familiar with the hysteria of the time will recall George Bush Jr. exhorting Americans to max-out their credit cards because “spending is Patriotic”. Back then, the U.S. economy had not yet been completely destroyed, millions more Americans were working, wages were much higher, and total consumer debt was nearly $1 trillion lower. In short, back in 2001 it was at least arguable that Americans might be able to repay all that new debt.

A decade later the picture is much simpler. All that the $20 billion in new debt which Americans piled on in November 2011 represents is $20 billion more in debt-defaults (and bankruptcies) over the next months/years, given that it is a unequivocal arithmetic that the U.S.’s debt-default spiral can only intensify in the years ahead.

The supposed “de-leveraging” which the mainstream media boasted of was nothing but propaganda mythology. However, the $100 billion in new consumer debt (alone) which Americans have piled on since the beginning of 2010 is very, very real. And all the new U.S. auto-loan defaults, credit-card defaults, student-loan defaults, personal bankruptcies, and foreclosures in the months ahead will be very, very real as well.

Related: Financial Sector ETF (NYSEARCA:XLF), Direxion Daily Financial Bull 3X Shares ETF (NYSEARCA:FAS),  ProShares UltraShort Financials ETF (NYSEARCA:SKF), Direxion Daily Financial Bear 3X Shares ETF (NYSEARCA:FAZ), ProShares Ultra Financials (NYSEARCA:UYG), Citigroup Inc. (NYSE:C), Goldman Sachs Group Inc. (NYSE:GS), and Bank of America (NYSE:BAC).

Written By Jeff Nielson From Bullion Bulls Canada

Jeff Nielson is from Canada and is a writer/editor for Bullion Bulls Canada   He has a personal background in law and economics. Bullion Bulls  Canada provides general macro-economic and political commentary,  since  the precious metals markets are among the most complex (and  misunderstood) in the world.

Bullion Bulls Canada also provides basic coverage of Canadian  precious metals mining companies. Canada is the global leader in mining   exploration, and Canadian-listed mining companies (on the Toronto Stock Exchange and Venture Exchange) are responsible for the majority of the  world’s most-promising discoveries.

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