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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, this week’s
report showing $15 billion growth in consumer credit was widely heralded as
proof of America’s
economic strength and resilience. However, we are now suffering the
after effects of too much debt, and our salvation cannot be found in more of
the same.
Credit card debt, which now stands at whopping $957 billion nationally
(approximately $3,000 for every citizen) has, in recent years taken on a
different role in American life. While in the past cards were used primarily
to purchase big ticket items, spreading out costs over many months, they are
now increasingly 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 adding interest to the cost 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
the last remaining life line. 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, 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 4-year high of 4.5%.
Also, the reliance on credit cards is preventing some of the markets
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 consumption, taking some of the upward pressure
off gas prices.
It should be painfully obvious that expanded consumer credit is not
evidence of improvement, but simply, deterioration. 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 even
greater economic hole and laying the foundation for the next major credit
debacle. It’s fitting that just as both Treasury Secretary Paulson and JP Morgan CEO Jamie Dimon
declared that the worst of the crisis has past, we are on the verge of
kicking the whole thing into a much higher gear!
My guess is that many Americas
continue to run up massive credit card debt because
they have little intention of every paying it off. Since many who are
underwater on the home loans, and behind on the auto
and student loans see bankruptcy as a foregone conclusion, they see no
downside to pilling 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 who are afflicted with spiraling
monthly payments will make credit card relief a potent political issue for
crusading Congressman 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 why not the latter? 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 have
theirs forgiven?
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. 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 will
finally be forced to dramatically curtail their spending, and the recession
will finally gather serious momentum.
Peter
D. Schiff
President/Chief Global Strategist
Euro Pacific Capital, Inc.
20271 Acacia Street, #200 Newport Beach, CA
92660
Toll-free:
888-377-3722 / Direct:
203-972-9300 Fax: 949-863-7100
www.europac.net
pschiff@europac.net
For a more in depth analysis of the
tenuous position of the American economy, the housing and mortgage markets,
and U.S. dollar denominated investments, read my new book "Crash Proof:
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