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Five Things: Is the Consumer Structurally Over Leveraged?


Debt thresholds are a function of social mood and risk appetite.


1. Is the Consumer Structurally Over Leveraged?

If there is one axiom of today's Pigovian pessimism it is the idea that after decades of decadent reliance on debt to goose up consumption, US consumers are structurally over leveraged. And that it may take a decade or more of pain to unwind the damage, during which time US consumption and GDP growth will be pitifully slow.

-- Jonathan Wilmot,
chief global strategist at Credit Suisse Investment Bank, blogging on FT Alphaville

Ah yes, "structural over-leverage." It's such a neat and tidy phrase for a conveniently moving target. After all, if we were able to truly pin down one or the other -- either the structural part or the over-leveraged part -- the game would be "in the bag" as they say in certain parts of rural America where the thirst for wild animal competition runs hot and fierce. But seeing as that's not really the case, we're left with a straw man to contend with; the wispy scarecrow figurine of "structural over-leverage."

Examined up close, scarecrows are never as they appear from afar. What does it mean to be structurally over-leveraged? No one can really say for sure, because taking down debt and servicing it -- the only perspective that really matters -- is a function of social mood and risk appetites.

During periods of increasing risk appetites and rising social mood, acceptable debt thresholds are perceived to be far higher than during periods of declining risk appetites and declining social mood. This isn't a novel insight, but it eats away at the center of debt ratios alone as a useful guide to determining future consumption levels.

"Why do we find it so emotionally satisfying to believe that US consumers have become irrationally and recklessly over-borrowed when the facts don't really live up to the caricature?" our guest blogger asks. A reasonable question, and one that was quickly answered in the comments section at FT Alphaville by a commenter who goes by the name, "K Mark": "It's not just that the consumer is crippled with debt or lack or credit. There is a cultural force at work -- people are looking for something other than consumerism to satisfy the soul."


2.Too Much to Bear

These are queasy times. There's an unruly stomach-twisting roil being passed around, one that's sending even the most hard-hearted observers scurrying into bearish hibernation, screaming about the weight of it all being too much to bear.

Yesterday, Nassim Nicholas Taleb, author of The Black Swan, wrote, "What I am seeing and hearing on the news -- the reappointment of Bernanke -- is too hard for me to bear." See, I'm not just sitting around making this stuff up willy nilly. It's actually happening.

That someone finds the reappointment of Federal Reserve Chairman Ben Bernanke "too much to bear" is hardly surprising. Remember when George W. Bush beat John Kerry a few years ago and everyone moved to Canada? No, what's surprising about someone finding Bernanke's reappointment too much to bear is that the someone unable to bear it is Taleb.

As we shall soon see, and based on his own work, it's rather surprising to see Taleb concerned with the various econo-political machinations that constitute the day-to-day grist for the news mills.

3. Fairly Valued for Usefulness, News Should be Priced at "Free"

There's a truism about information that has long withstood the test of time and fortunes large and small, from the racetrack to the futures pit, and it is this: The more information you gather under conditions of uncertainty, the worse your decision making will be. It's unorthodox, counter-intuitive, and difficult to accept, which is what makes it a truism in the first place. Otherwise, it would be a piece of information, and we all know how much that is worth. Ho ho.

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