Yesterday's report that consumer credit contracted $21.6 billion in July marks about one year of diminished household borrowing and the outstanding amount is now firmly in negative territory when it comes to year-over-year comparisons. There was a bit of hand-wringing yesterday about what to do given that no borrowing means no consumer spending and without spending. . . There really isn't much that can be done as a quick fix given falling wages and depressed asset values.
The accompanying chart illustrates the ratio of consumer credit to wage and salary disbursements. As you would expect, the ratio has been rising steadily but without asset values growing there is a natural ceiling to how much current income is going to support debt. Home and equity prices are steadying but job losses continue and wages disbursements are below year-ago levels, so there is every reason to believe debt/income ratios are still well above desired levels and that outstanding debt levels have only begun to fall.