Just how much borrowing is out there?  Just how much of the economy is based on demand from earned income? demand from responsible credit?  demand from excessive credit?

In past posts I have suggested that the world is changing and credit bubbles are unlike other bubbles because they affect everything.  The world is changing because demand is falling.  Dramatically at first (anyone notice the cliff we fell off?) but then in a long-term down trend.  Why do I think that?  Consumer credit declined by the most since 1942 in March and their earning power for  the next six months to a year do not look exciting.  Does anyone expect them in the aggregate to increase borrowing, No. 

Just how big do you think the economy would be if everyone adopted my parents spending and savings habits?  No credit card or consumer loans and still pays the savings account the first 10 percent of all income.  The consumer is starting to get it, now we need to wait for President Obama and Congress to get it.

Consumers are beginning to realize something business people have known for a long-time, leverage magnifies the experience and not all experiences are worth magnifying.  The more leverage, the more stress and the less room for operational error.  People and families do not need the extra stress that operating in highly leveraged state entails.  As they reduce their debt loads the stress will fade and once they recognize why things seam better, they will begin paying off all their debt in earnest. 

The total US economy will be much smaller in the future as debt is paid down for three reasons.

Consumption will decline because people will actually start saving a portion of their income.
Consumption will decline more at first in order to pay down debt from past consumption.
Government will contract as the economy contracts and everyone starts living within their means.

It is my estimate based on the the 80/20 rule and the 20 represents the credit excess part of the economy and that is the part that  will contract.  Given Q4 2008 was down 1.5 percent and Q1 2009  was also down 1.5 percent, we still have 17 percent  more to go.  That additional 17 percent contraction will not be in one quarter but will be front loaded and I expect the total contraction will take about five years which we are already into it two quarters.  As government begin to realize their only choice is to contract (California is coming to that conclusion now) you will see an acceleration (another cliff) in consumption and with that a "surprise" in the equity market. 

Just think, a bad economy does wonders for global warming!