Doesn't look good to me. Almost $1 trillion in credit card debt. Is this something that could turn a recession into a depression?

We've read that MEW has declined and credit card debt has accellerated. Can we get some kind of a year to date trend in what has happened more recently?

o rate cut?

U.S. Aug ISM services 55.8% vs 55.8% in July

IMHO

If the low interest HELO and declining standards to make RE loans and increasing RE prices had not been, we would have hit the CC crisis aways back.

Now we hit CC crisis, just as underlying assets are declining and claims against those assets are at a maximum. In simple terms the ability to pay the cards with asset transfers or RE loans are bad and declining.

The only thing that can help is declining consumption. And that will hit the economy bad.

Why was The Bankruptcy Reform Act of 2005 enacted at such a time where consumer debt was expanding at that rate?
I wonder why the legislation did not address interest rates on credit cards?
Why didn't it encourage or regulate for clarity of critical terms and conditions on credit card applications?

Let's see:

1. Complete collapse of housing market? check
2. Downturn in commercial real estate? sighted
3. Credit card crunch? present
4. 2 year severe recession for domestic auto industry with no end in sight? ugh

So I do think it's important to separate out activity from revolving balance.
Obviously that data exists... isn't it part of the basis for a credit report ?

In case you missed the good research and post by safe_as_apartments, I'm re-posting it here:

According to CardTrak,

"Of the $850 billion in credit card debt, about 18% is paid-off each month without incurring interest charges and about 3% is revolving business credit card debt, according to CardData (http://www.carddata.com) Discounting interest-free and commercial debt, Americans are revolving about $672 billion on all credit cards."

CardTrak.com - CardFacts Media Center
safe_as_apartments | 09.06.07 - 10:07 am | #

Nothing to worry about. Relax. We'll be fine as long as the credit card companies don't pursue subprime borrowers.

Credit card companies pursue subprime borrowers 

Oh. Well, we'll still be fine as long as they aren't engaging in risky, irresponsible lending to vulnerable consumers.

I need sleep.

I love this headline from Market Watch :

Economic data showing strong productivity and slide in jobless claims, along with relative outperformance in retail, power unsustained rise.

Two words, four syllables:

Debtors Union

Someone should do it, and I expect now is as good a time as any.

People could collectively bargain for fairer terms on their credit card debt and use a collective stop payment as their main threat. I think that, more than anything, people have their debt in common.

I've had numerous disagreements with my girlfriend (who is much smarter and more learned than I) about this. I want to lead the Debtors' Union because I am vain and am fascinated by the image of standing in front of the federal reserve with an ocean of debtors before me and yelling, "STOP PAYMENT! STOP PAYMENT NOW!!" into a microphone. She, on the mano otro, believes it best to let the idea float out into the system and have all debtors organize together.

In deference to her, I give you "Debtors' Union".. use the idea wisely.. I fear it will grow out of control and destroy our financial system.

Also, I believe there is/was a version of this in Central or South America. Their catch phrase is/was "I owe money, this is true, but I will pay what is fair"

STOP PAYMENT! STOP PAYMENT NOW!!

So if the average American owes ~$7,500 (of debt they do not pay off)then the average homeowning family owes $15,000. Can we assume that they do not have $15,000 in savings to simply cancel this out? In which case the card debt works as an anchor as soon as the typical American family hits any type of financial dislocation.

"For example, say you regularly charge $1,000 a month on a card. You always pay off the balance at the end of the month. But at the same time, you are charging up another $1,000.

There's no difference between this and borrowing $1,000 from the bank permanently. Either way, you're always in hock $1,000."

Sure, but it ends up that the bank is funding your working capital requirements interest free.

Put it this way, you've put that $1000 in more productive assets, say a CD earning 5%, and instead of paying for purchases with cash, you end up with $50 in interest at the end of the year because the bank has funded your working capital interest free.

Don't forget, you're doing the same thing for your employer unless you're paid in advance

--
I sincerely hope that one day Tanta and the rest here understand one fact that there is a direct cause and effect relationship between increase in Consumption Debt (including the Federal deficit that funds consumption, which is mostly the case), corporate profits and, hence, the stock market. Needless to point out that a very large % of the compensation of corporate chieftains has been in the form of stock prices going up. Also, other things being equal Consumption Debt pushes the inflation rate up. When debt starts to decline we should see outright deflation due to sharp fall in the aggregate demand.

Pushing Consumption Debt has been the game that the USG, the Fed and the corporations have been playing, especially, for the past 5 years.

It Is the Debt, Stupid! (That kept the US economy artificially going and will take it down very hard).

Jas

Well, if any of these CC folks are hoping for an imminent rate cut, this pretty much rules it out :
DOW JONES NEWSWIRES
...Poole acknowledged, but given that the unemployment rate has hovered around 4.5% since January, "the economy seems to be operating near full employment."
"Rather than being a sign of a weakening economy, the recent slowdown in the rate of job creation is almost certainly related to a slowing of labor force growth as the baby-boom generation reaches retirement age," Poole noted."

Just remember the Fed's mandate. Full employment...

"If most people who pay off the balance are using credit cards as an interest free payday loan then, I agree with you. I don’t know how you can find the proportion."

Exactly. Except payday loans are for poor people who have to shlep down to some seedy place once a month. Credit cards are for "affluent" people who can get payday loans anywhere and several times a day, every day of the month. It's much more elegant and convenient.

Many American households are not poor. But a large part of their savings is in relatively illiquid places, such as IRAs or 401(k)s. The best way to finance day-to-day lifestyles is with credit card payday loans. Nobody holds it against you, and it does help to BUILD YOUR CREDIT.

Ah, the debtors' union was El Barzón, and it's in Mexico.

"Debo no niego, pago lo justo" ("I owe, I don't deny it, I'll pay what is fair")

And yet those credit card companies are still reporting record earnings based on their 18-30% interest rate plus late fee charges when really their customers are just canibalizing the principle. . . oh well, its unsecured. The Fed measures these CC companies as a part of the "growing economy".

There will be some large losses here.

Whether the Middle Class in America is spending on basics or luxuries, economists have a built in assumption that it has a 100% propensity to consume. Some might be savers, some may die in debt. On average, 100% of Middle Class take home pay is spent.
This is factored in decisions on tax policy. In brief:
Do we need more investment? Give a break to the rich.
Do we need more consumption? Give a break to the middle class.

This bald reality is lost in political rhetoric.

Basically, the debt on credit cards just grew at slightly more than inflation over the last few years, whereas in the 1980s and 90s it was increasing much faster than inflation.

I read somewhere that credit card profits always peak as things turn bad, there's a sweet spot between when card holders rack up debt and when they start defaulting in real numbers.

Credit Card debt is not free, even if you pay your balances in full every month. You pay a fee everytime you buy something at almost any store in the Country. It's just that people who pay cash are changed the fee as well.

I pay for the store's property taxes too, but I really don't factor that into my thinking.

I financed the last few months of grad school back in the 90's on revolving credit, then paid it off. Since paying that off, I've used credit cards on a pay-full-balance basis.

But I'm a bit unusual in that I save 30% of my income. Very few people are willing to live on $40k when they have a $60k income.