The decline of credit cards

Considering that our economy is based on consumer spending, yesterday should have been a terrible day in the markets.

Sept. 8 (Bloomberg) -- U.S. consumer credit plunged more than five times as much as forecast in July as banks restricted lending terms and job losses made Americans reluctant to borrow.

Consumer credit fell by a record $21.6 billion, or 10 percent at an annual rate.... Credit dropped by $15.5 billion in June, more than previously estimated. Credit fell for a sixth month, the longest series of declines since 1991. (source)

So, the consensus among financial analysts was too optimistic by a factor of five. Mind you, these are the people telling us that the economy is recovering. Ha!

Let's look at this in graph form, courtesy Karl Denninger (click to enlarge):



Every source of money available to the middle class is drying up. One in five workers are unemployed or underemployed. Hours worked per week have fallen. Wages are falling in real terms. Home equity is gone. 401k's and IRA's may have rallied, but most are still far below what they were last summer or in 2007. What we've got left is consumer credit, and this is disappearing at a 10%-per-year rate. [Edit: I didn't make this clear, but consumer credit also includes auto loans and other loans for big-ticket items.] How fast, then, is consumer spending going to decline over the next 12 months?

It's true that some part of the decline in credit is because those who are still well-off are reluctant to take on debts. A credit card they might have signed up for 2 years ago holds far less appeal today, when people fear for their jobs and just want to save some money away, if they're able. But for many, their credit is being cut off. As Mish and Karl Denninger have put it, those who could borrow refuse to; those who would borrow cannot.

Meanwhile, today's buzz was over a YouTube video titled Debtors Revolt Begins Now, featuring a woman telling Bank of America that because they raised her credit card interest rate to 30% for no reason, she was not paying them another red cent. In the comments at Zero Hedge the sentiment was mostly of the "Brava!" sort. Apparently this is called "radical default" in the industry-- people who simply will not pay, no matter what they are threatened with, even if they still have some ability to pay. Part of the attitude is: the banks don't give credit to those who need it anyway, so what the hell do we care about credit ratings? If we should ever desperately need credit, by definition we'll be denied!

The hotels and car rental outfits better be thinking about what to do when half their would-be clients haven't got credit cards anymore. Maybe in ten years we'll be telling kids how you used to be able to buy things using a little plastic rectangle, even if you couldn't cough up the money till months or years later.