This data from the fed makes me wonder what is going on with all the headlines suggesting that the economic slowdown is coming from hurting consumers.
January 10th Consumer Credit data
Sure, I get the logic: I am levered, I can't afford my ARM, I can't afford higher CC rates, so I can't spend more.
But what does this rapid increase in revolving credit mean? I mean it popped 10% in November which is the most recent data available. Is this all increasing balances? It seems like it has to be the "Christmas shopping" season, which seems relatively strong at least in the sense that the consumer credit market remains open in a way that subprime lending is no longer available...
So does that mean that savings are tapped out and now people are just at the end of their rope?
Whatever it means, it sure doesn't look pretty for the balance sheets of households across the country, but it sure does seem that people are willing to keep flashing the plastic to get some bling.
Any thoughts are appreciated on this one.
Thursday, January 24, 2008
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3 comments:
How do you think out of work building contractors with a mortgage, a wife and four kids are paying for their winter heating oil? Yea, the lenders will be stuck with the losses when the debt goes bad, but bailing out a few lenders is easier than cutting off millions of borrowers at a time when policymakers are doing everything they can to get people to spend.
If sub-prime mortgage loans were an example of overly lax lending standards, then how do you describe 10,000 dollar credit lines for marginally employed 22 year olds with no assets, no job security, making minimal monthly payments and living at home with their parents? For a long time I've figured most of those balances would never be repaid, even before I realized the significance of that fact. They can afford the minimal payment by working part time at Starbucks, Applebee's, Bestbuy, Home Depot, etc. But much of the revenues of these companies are derived from credit card purchases being paid off a little a month.
Now what happens when group A (say, mortgage brokers, construction workers, remodeling contractors, etc.) are out of work and unable to make their rent or heating bill? They start running up CC balances to pay for food and heating oil.
Now what happens to all those part-time Starbucks and Applebee's employees with the 10k CC balances making minimal monthly payments? They lose their jobs next as Starbucks cuts back. They can't find work right away, so they start running up CC balances to pay for gas and food, etc.
You have to remember: people didn't spend a lot of money and buy a lot of consumer goods; banks did. Your neighbor did not buy a flat screen TV, his CC company did. Your friend didn't save up and spend $900 on that new car stereo system, Mastercard did. He's gonna be buying it for the next 5 years, or at least that's the plan.
But if his income and job are dependent on the continued appetite of banks for flat screen tvs, $900 car stereos, and other consumer goods, there might not be a definite job available to him so that he can keep up with the minimum payment. And I have a feeling banks may soon lose that appetite.
Not everyone can buy things they can't afford, no matter how small the payments. If everyone buys more than they can presently afford, then at some point in the future, everyone will have to buy less than they can afford, to pay for today's purchases. But obviously if everyone was spending their future (assumed) income today, today's income was really also the future's income, and assumptions made about future income were incorrectly based on artificial demand -- demand which won't be available for tomorrow's income. Debt which was incurred on the basis of today's inflated income will have to be serviced on the basis of tomorrow's reduced income. Thats why booms are followed by busts when the economy is stimulated by artificial demand borrowed from the future...
How do you think out of work building contractors with a mortgage, a wife and four kids are paying for their winter heating oil? Yea, the lenders will be stuck with the losses when the debt goes bad, but bailing out a few lenders is easier than cutting off millions of borrowers at a time when policymakers are doing everything they can to get people to spend.
If sub-prime mortgage loans were an example of overly lax lending standards, then how do you describe 10,000 dollar credit lines for marginally employed 22 year olds with no assets, no job security, making minimal monthly payments and living at home with their parents? For a long time I've figured most of those balances would never be repaid, even before I realized the significance of that fact. They can afford the minimal payment by working part time at Starbucks, Applebee's, Bestbuy, Home Depot, etc. But much of the revenues of these companies are derived from credit card purchases being paid off a little a month.
Now what happens when group A (say, mortgage brokers, construction workers, remodeling contractors, etc.) are out of work and unable to make their rent or heating bill? They start running up CC balances to pay for food and heating oil.
Now what happens to all those part-time Starbucks and Applebee's employees with the 10k CC balances making minimal monthly payments? They lose their jobs next as Starbucks cuts back. They can't find work right away, so they start running up CC balances to pay for gas and food, etc.
You have to remember: people didn't spend a lot of money and buy a lot of consumer goods; banks did. Your neighbor did not buy a flat screen TV, his CC company did. Your friend didn't save up and spend $900 on that new car stereo system, Mastercard did. He's gonna be buying it for the next 5 years, or at least that's the plan.
But if his income and job are dependent on the continued appetite of banks for flat screen tvs, $900 car stereos, and other consumer goods, there might not be a definite job available to him so that he can keep up with the minimum payment. And I have a feeling banks may soon lose that appetite.
Not everyone can buy things they can't afford, no matter how small the payments. If everyone buys more than they can presently afford, then at some point in the future, everyone will have to buy less than they can afford, to pay for today's purchases. But obviously if everyone was spending their future (assumed) income today, today's income was really also the future's income, and assumptions made about future income were incorrectly based on artificial demand -- demand which won't be available for tomorrow's income. Debt which was incurred on the basis of today's inflated income will have to be serviced on the basis of tomorrow's reduced income. Thats why booms are followed by busts when the economy is stimulated by artificial demand borrowed from the future...
Thanks for the thoughts. I agree that the overly-leveraged consumer is starting to reach the breaking point and we will only see an uptick in defaults at the CC and Auto-loan level over the coming months.
I also agree that the boom-bust cycle is inevitable in such a credit-fueled economy.
I only hope we can somehow dampen the blow of this continued trainwreck somehow. Not for the banks' sake, but for those who have been chasing the American Dream in vain.
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