Look at the explosion of consumer debt (credit cards, auto loans, bank loans) over the last 20 years, rising to $2.6 trillion. Household debt, including mortgages, skyrocketed from 47% of personal income in 1959 to 117% in the fourth quarter of 2007. And from 25% of GDP in the first quarter of 1952 to 98% (Gary Shilling).


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Let's look at some numbers. Since January 1, 2008, owners of stocks of US corporations have suffered about $8 trillion in losses, as their holdings declined in value from $20 trillion to $12 trillion. (Losses in other countries have averaged about 40%.) Homeowners will soon see their equity down by as much as $8 trillion, and those losses are likely to increase.

Mortgage equity withdrawals counted for a full 3% of annual GDP growth in the period from 2002-2007. MEWs have fallen by 95%, and are falling again this quarter. Credit card debt is being reigned in. In fact, as the chart below shows, bankers are not surprisingly tightening lending standards to consumers, and raising their rates (courtesy of Northern Trust).


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Much of US GDP growth has been fueled by debt. And that debt is now going to be much harder to get, as equity in both houses and stocks has fallen precipitously.

Further, US consumers are clearly cutting back. The retail sales figures that came out this week are dismal. J.C. Penney (JCP) stores are down 13% year over year! At Nordstrom's (JWN), sales are down almost 16% (6 months ago they were growing at 10%!). Sales at major discounter Costco (COST) were down 1%. The Gap (GPS), The Limited (LTD), Target (TGT) - store after store is down. Limited Brand sales are down by 70% from October of last year. All this does not bode well for Christmas sales (thanks to Greg Weldon of  for that data.)

Remember how I talked about how auto manufacturers had cannibalized future sales? Credit cards have allowed many retailers to do the same. Money that goes to cut down credit card debt is money not spent today.

Consumers leveraged their way to higher levels of consumption, and now are going to be forced to reduce that leverage. Many others are going to see the need to increase savings to shore up retirement funds. People (and not just in the US, but throughout Europe) have learned that a home is not an investment.

Hedge funds are also being forced to de-lever. While for most styles of hedge funds, leverage was not all that high (an average of about 1.4 times equity), large redemptions, especially by funds of funds, are forcing sales of all types of assets, but in particular stocks. As an aside, this selling is not over. Mutual funds are seeing large withdrawals, and are also selling.