Authored by Michael Maharrey via SchiffGold.com,
Americans are worried about a looming credit crunch. That’s a big problem for an economy that runs on credit cards.
One of the reasons for economic optimism you’ll hear bandied about out there in the mainstream is “the American consumer is strong” and consumer spending is “holding up” despite price inflation. But nobody seems to ask an important question: how have Americans been able to continue spending?
The answer is credit cards.
So, what’s going to happen when consumers finally max out the plastic?
We may be getting close to that point, and many people are worried that they aren’t going to be able to borrow the money they need to keep spending.
As prices skyrocketed last year, Americans blew through their savings to make ends meet. Aggregate savings peaked at $2.1 trillion in August 2021. As of June, the San Francisco Fed estimated that aggregate savings had dropped to $190 billion.
In other words, Americans ate away $1.9 trillion in savings in just two years.
Then they turned to credit cards.
Americans used stimulus money to pay down credit card debt during the pandemic. Americans owed a little over $1 trillion in revolving debt when the pandemic began. It fell below that level in 2020 thanks to an 11.2% drop. We saw small upticks in credit card balances in February and March of 2021 as the recovery began, with a sharp drop in April when another round of stimulus checks rolled out. But Americans started borrowing in earnest again in May 2021. Since then, we’ve seen a relatively steady increase in revolving debt.
As of the end of July, Americans owed $1.27 trillion in revolving credit.
The bigger problem is the double whammy of rising debt and rising interest rates. Average credit card interest rates eclipsed the previous record high of 17.87% months ago. The average annual percentage rate (APR) currently stands at 20.71%.
As a result, more and more Americans are struggling to pay their credit card balances.
Now there is another looming problem. It’s getting harder for Americans to borrow money.
And that has them worried.
Nearly 60% of the respondents in a New York Fed consumer expectations survey said it’s harder to get credit cards, mortgages and other loans than it was a year ago. It was the highest level since the New York Fed started the data series back in 2013.
Another Fed survey of loan officers reveals their fears aren’t unfounded. Banks reported that lending standards tightened across all consumer loan categories and all categories of residential real estate (RRE) loans. Meanwhile, the number of banks reporting tighter standards for credit cards rose by 36%.
Banks have also significantly tightened standards for business loans.
This is a recipe for disaster.
We have an economy that runs on debt and borrowing. Debt has become much more expensive with rising interest rates and it’s getting harder to get loans. Meanwhile, more and more Americans are maxing out their credit cards, and they are starting to have trouble paying the bills.
It seems likely that at some point in the near future, the tidal wave of debt is going to drown the “resilient American consumer” and the American economy is going to plunge over a cliff.
The mainstream narrative is that the economy is fine because consumers are still spending despite high price inflation and rising interest rates. But nothing about this is fine.
The underlying assumption is that Americans wouldn’t keep spending if they were really in trouble. But I think a lot of people are spending on credit cards precisely because they are in trouble. They don’t have a choice.
A JD Power analyst made this very point.
The pandemic-era savings cushions are gone, the economy is shaky and consumers are leaning more heavily than ever on their credit cards to cover day-to-day expenses. Consumers are using their cards for a lot of everyday purchases. Grocery shopping is the lead purchase type that consumers say they are making.”
Even the mainstream is starting to recognize this isn’t a sustainable trajectory. Bloomberg reported, “Despite persistent inflation and high interest rates, consumer spending has remained resilient and helped power the economy. Some have resorted to credit cards and savings to do so, but with savings shrinking and delinquencies on the rise, some economists doubt the current spending momentum is sustainable.”
It’s not.
Americans have managed to kick the can down the road using credit cards and accumulated savings. The question is how much road is left?
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Credit crunch already happening
I made sure I had every debt, mortgage, auto, credit card paid off 5 years ago before retiring. If we have to use credit the bill is paid off every month. That is how you survive a credit crunch.
I always use a credit card to buy everything.
That way, I can have a record of what I spend on and might have been stupid with.
I always pay down to zero balance on paydays to get the rewards points and no interest.
I do the exact same thing every month. House is paid for and no debt for the last 20 years. Just retired last week.
Give yourself a pat on the back. You must be a special boi…reee
You are an pinched, stunted wretch. He described helpful financial tactics. He wasn’t bragging. You’re projecting and tipping your hand. You’re very petty and judgmental . . . holier-than-thou. Look inward. Grow.
(Maybe this uber godbotherer won’t reply with vile homoerotic cussing for once.)
flash ,I’m with you more times than not . So what is your point.
We should have listened to the founding fathers, they warned us.
I knew a guy , maxed out about 50k in guns, ammo, camping gear, tools etc..his truck was paid off. Went Galt big time off to the woods somewhere. That may be the ticket.
You get three hots and a cot in prison. That’s my backup plan.
What about Big Bubba as a boyfriend? I’ll stay on the outside.
Laquentarius be a waitin fo ya.
Become an Aryan. That ain’t funny, Pat.
This dog we have is costing way too much. Vet, food, you name it. Anyone have any good dog recipes?
https://en.wikibooks.org/wiki/Cookbook:Dog
.
.
.
Dog Meat Cooking, How to Eat Dogs and Dog Slaughter
.
Fuckin’ savages.
Ground and pan fried dog isn’t bad. Korean neighbor told me that
Do you have any Vietnamese neighbors?
Boiled chicken .
Buy chicken.
Boil in water.
Let cool and de-bone before feeding.
Credit is money, too and cutting credit will be the one two punch to finish off the middle class.
1) The total currency (actual cash in the form of bills and coins) in the US financial system is a little over $1.36 trillion
2) When you include digital money sitting in short-term accounts and long-term accounts then you’re talking about roughly $10 trillion in “money” in the financial system.
3) In contrast, the money in the US stock market (equity shares in publicly traded companies) is over $20 trillion in size.
4) The US bond market (money that has been lent to corporations, municipal Governments, State Governments, and the Federal Government) is almost twice this at $38 trillion
5) Total Credit Market Instruments (mortgages, collateralized debt obligations, junk bonds, commercial paper and other digitally-based “money” that is based on debt) is even larger $58.7 trillion.
6) Unregulated over the counter derivatives traded between the big banks and corporations is north of $220 trillion
When looking over these data points, the first thing that jumps out at the viewer is that the vast bulk of “money” in the system is in the form of digital loans or credit (non-physical debt).
Put another way, actual physical money or cash (as in bills or coins you can hold in your hand) comprises less than 1% of the “money” in the financial system.
The thing is, most of that $10 trillion is bullshit, and can evaporate overnight. It is called money destruction, and it is something most people do not understand. The average consumer has all his wealth basically in 2 things, home equity, and retirement or brokerage accounts invested in mostly equities, corporate debt, and municipal debt.
Suppose John Smith owns a home valued at $700K on which he has a $400K mortgage, and he has $300K in his 401K invested in 60/40 stocks and bonds.
He wakes up on Oct. 29th and the Stock Market is crashing. He does what he has always been told and holds steady because we all know stocks always go up after a dip. The market continues to crash day after day, and within 2 weeks, his 300K is valued around $120K. The economy freezes up and rumors around his company are that layoffs are coming.
A week later, he gets an email, he has been terminated.
He calls everyone he knows, but no one is hiring. He begins to collect unemployment, but it does not cover his bills which are becoming delinquent. He goes to his broker and tells him he needs to access some of his retirement money. The broker tells him the market has fallen another 25% and that he must withhold 40% of whatever he sells because the government has changed rules on withdrawal’s.
He is now beginning to panic and calls his real estate agent to put his home on the market. The agent tells him there are no buyers, and that he has hundreds of comparable listings for less than what he owes. Nearly all the money he thought he had is now gone, and so is everyone else’s…. Trillions of dollars have disappeared through asset revaluation and debt default.
That is exactly what will happen. It is going to be ugly.
more than half of total physical paper dollars are overseas, held by various peoples as their life savings in the form of $100 bills. the rest is in the u.s.
also there is approximately $148 in physical coinage per united states resident, virtually all of it within u.s. boundaries.
Banks are in real trouble due to their long treasury positions. Most are hemorrhaging money having to cash in 30yr paper at a fraction of what they paid for it. To make matters worse, depositors are pulling their deposits because the banks refuse to pay interest that is anywhere close to money market rates.
Brokerage’s are paying 5%+ on money markets, compared to 1/2% for savings accounts. Banks are trying to build reserves, and cut risks, and are pulling back on writing new loans. Getting auto loans has become much harder, and banks are now looking to cut credit card limits on customers with high credit balances.
As real estate values begin falling, the home equity that backstops consumer credit will fall with it, resulting in falling credit scores and even tighter credit. For an economy that depends nearly entirely on credit, this is a feedback loop that ends in disaster.
“americans wouldn’t keep spending if they were in trouble”
they’re spending while they still can.
They are credit addicts, they will spend until they can’t.
We have scheduled an auction for Oct.28 due to health. I have been running a one-bed nursing home for the last two years and I can no longer keep up with the place.
It is a toss up whether it will actually happen, but I pray things hang on a few more months.
they are spending themselves into trouble.