Money Morning
From Money Morning:
By Peter D. Schiff
For those holding out hope that the American economy can miraculously avoid a long and deep recession, consumer credit is often viewed as the wonder drug that can cure all manner of economic ills. As such, last week’s report showing that consumer credit grew by $15 billion was widely heralded as proof of America’s economic strength and resilience.
The reality is very different, however: We’re already suffering from the aftereffects of too much debt, meaning that our salvation cannot be found in more of the same.
Death by a Thousand Charge Slips
Credit card debt, which now stands at whopping $957 billion nationally (approximately $3,000 for every U.S. citizen) has, in recent years, taken on a different role in the life of American consumers.
In the past, credit cards were used primarily to purchase big-ticket items, enabling consumers to spread the costs out over many months, making goods a bit more affordable.
Now, however, charge cards are increasingly being used to bridge the gap between cost of living and the diminishing purchasing power of Americans who have been taxed mercilessly by inflation. By buying with available credit instead of unavailable cash, consumers are not simply postponing the pain of higher prices, but compounding it by packing interest expenses into the costs of everyday purchases. In addition, as home equity credit is now unavailable to fund large purchases, many consumers are turning to non-deductible, higher-cost credit card debt as their last remaining lifeline. As such, credit card debt compounds steadily, and for many borrowers, becomes increasingly impossible to pay down.
The statistics tell the tale. According to Equifax Inc. (EFX) a credit card analysis firm, people have been buying more with their credit cards but paying down less. As a result, average balances jumped nearly 9% in 2007 and delinquency rates recently hit a four-year high of 4.5%.
Also, the reliance on credit cards is preventing some of the market’s salutary forces from working. With credit always an option, domestic demand remains strong - despite rising prices. Absent the option of putting more costly gasoline on their credit cards, Americans might have actually been forced to cut back on their fuel consumption, taking some of the upward pressure off gas prices.
It should be painfully obvious that expanded consumer credit is actually evidence of deterioration - not improvement. Unfortunately, when it comes to understanding the economy, there is little common sense on display. By going even deeper into debt just to make ends meet, American consumers are digging themselves, and our entire economy, into an ever-deeper economic hole and laying the foundation for the next major credit debacle. It’s fitting that just as both U.S. Treasury Secretary Henry M. Paulson and JP Morgan Chase & Co. (JPM) Chief Executive Officer Jamie Dimon declared that the worst of the crisis has past, we are on the verge of kicking this credit mess into a much-higher gear.
My guess is that many Americans continue to run up massive credit card debt because they have little intention of ever paying it off. Since many who are underwater on their home loans, and behind on their auto and student loans, too, see bankruptcy as a foregone conclusion, they see no reason not to just go ahead and pile on as much debt as possible while the taps remain open.
Those choking on credit-card debt may also be taking cheer from the gathering government campaign to bail out over-leveraged homeowners. The sheer numbers of consumers who are afflicted with spiraling monthly payments will make credit card relief a potent political issue for crusading congressional and presidential candidates. After all, there are few fundamental differences between those who borrowed too much to buy houses and those who made the same mistake with consumer goods.
If the government bails out the former, then why not the latter, as well? In fact, one reason some homeowners have such large mortgages is that they consolidated their credit card debts into their mortgages each time they refinanced. Why should renters be forced to pay off their credit card debts while homeowners get to have their debts forgiven?
It’s certainly a fair question.
But it may also be moot. Soon, as credit-card delinquencies rise - and losses on pools of securitized credit card debt mount - those supplying the credit will finally get wise to the fact they will never get their money back. As a result, the market for such debt will dry up even more quickly than did the market for subprime mortgages. Credit cards will therefore be much harder to come by and will have much lower limits then they do today. Limited to only the cash in their wallets, Americans finally will be forced to dramatically curtail their spending, and the recession will finally gather serious momentum.
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This article has 22 comments:
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fredoil
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1 Comment
May 15 02:18 PM-
lwaia
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1 Comment
May 15 03:24 PM-
ivy
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1 Comment
May 15 03:43 PM-
herohero
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15 Comments
May 15 04:25 PM-
rmendales
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8 Comments
May 15 04:39 PM-
gus the trader
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2 Comments
May 15 04:47 PM-
torino-t
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8 Comments
May 15 04:49 PMOutside of Europe, the rest of the world is just starting to get the prestige of carrying Credit Cards & using them. There'll be Billions of transactions in Brazil, Argentina, Chile,...China, India, the Middle East,...
Bottom line, these pull backs in Visa & MA is & is big buying opportunities to both CORE holdings & ofcourse CALL options.
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torino-t
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8 Comments
May 15 04:51 PM-
Skjellifetti
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58 Comments
May 15 05:26 PMwww.stlouisfed.org/pub...
40% or so of U.S. households have no credit card debt. The data seems to show that the problems are concentrated among lower and lower-middlle income households.
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Chorniki
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10 Comments
May 15 09:22 PMoffering to pay the @29.55 tab. Card rejected. Fished out another card. Rejected. Third try, card is accepted. My turn. Cash. Asked the attendant if the previous spectacle occurred often. ""All the
time, now." Appeared to be from lower-middle income classes.
Hey, the fun is just getting started!
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vasu sheth
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4 Comments
May 16 08:45 AM-
Frogman
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15 Comments
May 16 01:03 PM-
User 188394
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1 Comment
May 16 03:20 PM-
Christsmart Network
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1 Comment
May 16 05:30 PM-
financeguy
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1 Comment
May 16 10:17 PM-
Cat~eyes
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42 Comments
My Website
May 16 11:21 PM-
bishk1301
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11 Comments
May 17 04:28 AM-
Bill West
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19 Comments
May 17 04:46 PMPerhaps you have noticed the temporary slowdown and recent minor pullbacks in both Mastercard and Visa. While a check of the popular blogs and wallowing through the assorted financial internet commentary it has become apparent that many people still believe Mastercard and Visa are tied to the often mentioned credit crisis. Discover and American Express have these problems as bill collectors. Mastercard and Visa do not. Remember MA and V are simply toll-takers in the credit economy.
What all credit card companies do have are assorted fee structures, teaser rates, and different “merchant processing percentages”. These can be dependant on many factors and won’t be discussed here in great detail.
The outcome of the Capitol Hill hearings will be as follows-
We are currently heading toward an election. The continued bloviations on credit card practices can be equated with the oil company monopoly hearings that commence every time gas goes over $3 per gallon. (The lack of exploration and refinery construction won’t be debated here) Nothing has changed in oil for the most part has it? Not too much will change in the credit card industry either.
The do- nothing politicians will get some quotations in the record and little will change in the credit card industry with the exception of the following areas-
Credit card companies will reduce or eliminate many teaser introductory rates.
Bank issued credit card qualifications will become stricter as some defaults may increase.
Credit interest rate percentage increases will require customer notification and payment or payoff options to allow the customer a chance to prevent the implementation of these penalty rates.
Terms and credit card policies will be re-written in more layman friendly language.
Secured credit card options may be used more frequently when credit worthiness is questioned.
And now of most importance to Mastercard and Visa shareholders:
The numerous bank and merchant associations will square off on Capitol Hill complaining or justifying the “processing fees” of 1 to 4 percent that are paid directly to Mastercard and Visa. Those fee structures will remain in place with some attempts at downward renegotiation for some of the largest merchants. The little merchants won’t have much bargaining power. Sorry but that’s the law of large numbers. These processing fees will simply be passed on to the consumer if necessary. Don’t forget there is always the cash price versus the credit price if you are feeling really squeezed.
However with the increasing cashless nature of society in the United States and the international consumer markets skyrocketing the credit card business is becoming fully entrenched in the world of financial transactions large and small. As the emerging markets begin to trust the credit services of their respective banking systems; the issuance and accounting practices will become trusted and fully implemented. Paying by credit also provides fraud protection and faulty product redress in many cases.
Cash will soon become simply the path of last resort for emergencies, illegal businesses, persons “living off the grid”, and tips for persons employed in the service industries.
Bottom line: Mastercard and Visa are perfectly positioned for the continued growth of the credit card industry and will provide rich rewards for persons who invest early in both these stellar companies.
Disclosure- Long MA, V, XOM
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investmentAction
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9 Comments
My Website
May 19 07:57 PMVisa is damn strong here man.
And Olympics in coming! Transaction will rocket!
Check out my analysis... investmentaction.blogs...
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Go figure
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4 Comments
May 19 10:49 PMI am not of the belief that credit is not a serious issue in this country. I do believe that doom and gloom attracts more attention.
Consider that through the last two significant up cycles, 1995-2000 and 2003-2007, outstanding consumer credit (federalreserve.gov) has spiked from a few percent a year increase to 10% or 15% in years following negative market returns (yahoo ^GSPC historical). Could there be a correlation between choosing to put your money to work versus paying off or paying down debt?
There are many people in this country that can not handle money, but there is also a large percentage that can, and with significant dollars. I for one usually do not pass up "12 month same as cash" or 2.99% until paid in full offers. 2004 saw an increase in consumer debt jump 10.92% from the previous year of 5.64% and the S&P returned 32.78% from March 2003 to March 2004. Sounds like smart money to me.
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User 196270
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1 Comment
May 20 11:43 AM-
fxtrader07
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618 Comments
May 21 09:42 AM