Why credit cards matter so much

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switters's picture
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Why credit cards matter so much

From Sharon Astyk's excellent blog:

Why Credit Cards Matter So Much

Yesterday put the nail in the coffin of a move from recession (small "r") to Depression (capital "D). Two pieces of news that were absolutely essential came out - and no, neither one was that we've been in a recession since last year, or that last week's stock market rally was yet another sucker rally. The first was the observation that McDonalds is now the second-largest merchant vendor on credit cards - that is, people are now buying their Big Macs on plastic - in part because they don't have the cash. Credit card balances have risen enormously in the last few weeks, as people attempt to keep going through the holidays:

Commercial bank exposure via the total amount of credit card loans outstanding has risen more in the last 10 weeks than it did in the previous 10 months cobined. Moreover, the growth in the last 10 weeks - $32.3 billion, or roughly $600 million per shopping day - represents nominal growth of 9.3%, or 48.3% annualized over the last 10 weeks. According to American Express, delinquencies on credit payments rose to 4.1% of all credit outstanding in the third quarter, up from 2.5% in 2007, with Bank of America's rate rising even more steeply - to 5.9% for the period. Moreover, the pool of loans deemed uncollectable rose to a high 6.7% in the third quarter, soaring from 3.6% last September. What consumer spending there is has been fueled in part by credit card: The second-largest merchant-vendor for credit card use is now McDonalds. This suggests that many consumers are in serious distress if they need to get their $4 Big Mac and fries with a credit card.

The second is the news that credit card companies are planning to pull 2 trillion dollars of personal and small business credit lines over the coming months, to reduce their risk:

The credit card is the second key source of consumer liquidity, the first being jobs, the Oppenheimer & Co analyst noted.

"In other words, we expect available consumer liquidity in the form of credit-card lines to decline by 45 percent."

Almost all of the consumer spending we've done in the last few days has been done on credit. In November and December, retailers see more than 40% of their annual sales - and since the average American comes out of the holiday season with more than $800 in credit card debt, it is safe to say that retailers in general are dependent on an annual payback that is then amortized over mos tof the year in the form of personal credit. That is, the consumer spending economy, 70% of our total economic activity, is utterly dependent on consumer credit. And whether that's a good thing or not, the destruction of consumer credit lines will bring about a shift in consumer spending that makes the present economic woes looks petty.

But there's more to it than that - Americans have seen real wages decline, and have depended heavily on credit, and as unemployment rises and companies cut benefits, pensions and retirement savings disappear, they will depend on their credit more, not less. The credit card allows them to even out uneven income streams - and millions of Americans have them. Either they rely on uneven overtime, on tips, on seasonal boom and bust cycles, or as small business owners and contractors whose payment comes in irregularly.

When unemployment strikes, right or wrong, the expenses go on the credit card. When hours are cut back or paycuts proposed, the credit card covers the inevitable emergency car repairs or medical bills. Yes, people should have saved. Yes, running up credit card debt you aren't certain you will be able to pay off is dangerous. But it is also the case that saving has been enormously discouraged, and reliance on credit has become a cultural norm, even a cultural pressure. Cards poured out like water. Couples who arrived with a downpayment at a mortgage meeting were told to keep their cash and take out a 100% loan. Companies made huge sums of money by persuading ordinary people to put their money in the markets and that growth could never end. Yes, there is personal responsibility here, but the situation was not of each person's personal making, and there is plenty of blame to go around.

In difficult times, the American policy is to rely on credit as a reserve source, as a substitute for savings. And that reserve is about to be pulled out from under them. And for the best reasons - the ability to pay is declining rapidly. Most Americans have no idea how they would pay off their debt in this economy - and my bet is that most of them won't. Past recessions have been survived by increasing debt and sitting tight until things got better. Now, we can't increase debt, and we can't sit tight, and it will be a long time before things get better - much longer than most people forsee. You only have to look at the bank's own reasoning here - they are withdrawing their credit lines because they don't believe that a boom will come along and allow people to pay off before they are forced to default. They know that reducing credit on this scale will hurt them too - but their own internal analyses have convinced them that they are in more danger by loaning than they are by not loaning. Given the huge role of consumer credit in the economy, that's one big shift.

What is certain is that without credit, the recession will hit a lot harder, a lot faster than it has. Personal spending will drop a whole lot more. People who were getting at least Big Macs will stop having them to eat. Moreover, with reduced credit lines, people will be forced rapidly to assess their situation - the transition between unemployment and foreclosure, between a bad year and homelessness, between getting by and going hungry, between surviving a medical crisis and being bankrupted by it - will be much, much shorter.

Yes, building up credit card debt has been bad for us. But it has also functioned to delay our reckoning, to keep marginal participants in the economy going, to keep the economy going even as far as it has been. And without large open credit lines, life as we know it will shift. Suddenly, small businesses won't be able to buy inventory on credit - and many of those businesses will close. Travellers whose balances are near their new, dramatically lowered limit will not travel, because they can't reserve a car, a hotel room or a plane ticket. People will stop shopping online. And the kids whose daily meal, tragically enough, was the Big Mac (and we should remember that one out of every three Americans eats daily in a fast food restaurant) won't eat.



Davos's picture
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Re: Why credit cards matter so much

Hello Sharon:

 Great post. I also read: http://www.ft.com/cms/s/0/11344d06-befb-11dd-ae63-0000779fd18c.html

I estimate that the mortgage market will shrink for the first time in US history and that the credit card market will be 18 months behind it. While just over 70 per cent of US households have access to credit cards, 90 per cent of these people use credit cards as a cash-flow management vehicle, or revolve payments at least once a year. While the credit card market is small relative to the mortgage market, it has grown to play a key role in consumer liquidity. Declining liquidity here will have disastrous effects on consumer spending and the economy. My primary concern is preserving liquidity to consumers, who command more than two-thirds of gross domestic product. 

I don't think you or I could intentially kill the economy quicker than these bafoons are killing it by trying to help it. 

Damnthematrix's picture
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Consumption is a moral imperative.

Consumption is a moral imperative.   We must all do our bit for the
economy, & shop 'til we drop.

On Sunday, the New York Times' Louis Uchitelle laid out the numbers.
The best guess is that the economy is currently contracting at a rate
of 4 percent per quarter. (UPDATE -- I bungled this, the 4 percent is
per year, not quarter.)  (It could be worse. I've seen some estimates
that go as high as 7 percent.) Uchitelle reports that "offsetting that
contraction requires a federal infusion of at least $400 billion."

Just for fun, try dividing $400 billion by the roughly 300 million
population of the United States. It comes out to about $1,333. If every
man, woman and child spent $1,333 dollars above and beyond what they
are currently spending, we could, maybe, pull the economy back up to
zero growth. But, of course, it's ridiculous to imagine every American
having the cash to go on a spending spree like that. We got into this
whole mess by using cash extracted from wildly appreciating home equity
valuations to buy whatever we needed or wanted, from healthcare to a
new SUV to a second home. That's gone. For American consumers to buy
$400 billion worth of goods now would require maxing out a ton of
credit cards, and digging themselves even deeper into debt at a time
when credit card companies are raising interest rates as fast they can.

But let's suppose you are not underwater on your mortgage, you don't
have any credit card debt, you're gainfully employed, and you are
staring at a $499 price tag for a 32-inch flat screen HDTV from Sony?
Where's the harm in a little consumer gratification that might lend a
helping hand, however pitiful, to the larger economy -- if you can
afford it?

Doesn't that decision depend on just how bad you think things will get
in the future? Right now, the U.S. economy is shedding about 250,000
jobs a month. That number will undoubtedly go up. Are you really so
confident that your earning power next year is secure enough that you
can blithely ignore a blistering recession? Remember, purchasing
discounted consumer electronics isn't going to help out the larger
economy that much. What this economy really needs is for Americans to
start buying fully tricked-out Chevy Tahoes and Ford Expeditions again.
And that's just not going to happen in the near future, for a variety
of reasons, chief among them: You'd have to be friggin' crazy to think
that buying an expensive car right now is a smart economic decision, no
matter how low the price of gas gets.

But then we get smacked in the face again by the paradox of the
American economy. All those individual Americans making smart economic
decisions have brought the economy to a grinding halt. The smarter we
are, the worse it gets.

It sure seems like the current predicament is a case where a reliance
on free-market economics built on individuals' exercising rational
choice breaks down. Doing what seems best for the individual is sending
an ailing economy spiraling down to the hospice. But to jump-start the
economy, we're asking everyone to go out and spend their cash at
exactly the time when it seems most sensible to stuff it under the

Cue the federal government. Since it is government's responsibility to
take care of the collective, the government is the only actor in the
economy that can make the rational decision to spend hundreds of
billions of dollars creating jobs and giving individual Americans the
necessary confidence, and foundational support, to be active consumers
once again. And that doesn't mean another round of tax breaks, which
most of us will use to pay off our credit card debt or sock away in
savings accounts. It means buying bridges and roads and public
transportation systems and schools and hospitals and alternative energy
plants and whatever else seems to make sound infrastructural


Yes, we do need a shopping stampede -- but in Washington, not Wal-Mart.

― Andrew Leonard

Tuesday, Dec. 2, 2008 03:23 PST

switters's picture
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Posts: 744
Re: Why credit cards matter so much

I've seen a significant shift "on the ground", at least in my community, over the last few weeks.  Even people who are normally completely unaware of what's happening in the economy are starting to tune into the fact that we're headed into something very ugly. 

I don't know anyone that is planning big purchases at the moment.  Even those who are in a relatively good position with a stable job and no debt are not looking for new ways to spend money.  They're looking for ways to preserve it.

My father, who has been opposed to buying gold for a long time, finally asked me to help him acquire some.  On a personal level, that's as much of a sign of a shift in perception of this crisis than anything else!

drb's picture
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Joined: Oct 11 2008
Posts: 95
Re: Why credit cards matter so much (and so does data)
Widely repeated since Nov 1 (including this site) wrote:

credit card loans outstanding has risen more in the last 10 weeks than
it did in the previous 10 months combined. Moreover, the growth in the
last 10 weeks - $32.3 billion, or roughly $600 million per shopping day
- represents nominal growth of 9.3%, or 48.3% annualized over the last
10 weeks.

[First - to be clear - I am not attacking switters or chris]

The information reported above didn't seem to ring true (to me) when CM first referenced a blog with these numbers on this site (refer to http://www.peakprosperity.com/blog/other-shoe-drop-consumer-credit-cards... )  and I said so at the time.  However, I've been waiting for the G.19 numbers covering the month of October to be reported  - now that they are out  (see http://www.federalreserve.gov/releases/g19/Current/ ) they do not support these dramatic statements.

I cannot find a way to provide an Excel plot in this space - however crunching the numbers shows the following:

From Dec '07 thru Aug '08 Revolving credit increased from $941.8B to $973.8B (an annual rate increase of 5.1%)

From Aug '08 thru Oct  '08 Revolving credit increased from $973.8B to $976.1B (an annual rate increase of 1.4%)

In summary - the numbers show the exact opposite, the increase in revolving credit has been 'slowing' (not increasing) in the last 2-3 months and (per the G.19 report) Total (both Revolving and Non-Revolving) Consumer credit actually fell at an annual rate of 1-1/2 percent in the month of October and Revolving Credit was essentially flat.


I realize that some will announce that this is just another example of 'Fuzzy Numbers' - but first recognize that the majority of indicators reflect a dramatic 'decrease' in consumer spending over this period - not a dramatic increase.

Such proclamations (that credit card loans outstanding increased at an annualized rate of 48.3% - when actual numbers were less than 1/20th of that value) do not serve to lend credibility to our message nor lead to correct decisions. 

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