Fortune: The Next Credit Crunch

This story from Fortune touches on many themes I've been proposing since blog inception - stagnant wages even when adjusted for government's lousy measure of inflation, standards of living exaggerated by credit, no savings for many, etc etc. It is nice to see the mainstream media finally catching on. "Pooring of America" is really starting to catch on. (click to enlarge chart to right-------->)

Now, as I've said people are hiding in their credit cards - unlike home mortgages the rates are far more than what you get in a 1st or 2nd mortgage and when you start faltering the credit card companies are a lot less friendly to deal with. So we shall proceed for the next 3-5 quarters until people cannot juggle these credit cards anymore, and the minimum payments will surpass their ability to pay. [Apr 4: Late Payments on Consumer Loans Highest Level in 16 Years] And then will come the waves of personal bankruptcies. Then we can call a bottom ...

• We made it through the bursting of the Internet bubble and now the bursting of the real estate bubble. Next we may be approaching the end of the most worrisome bubble of all: the standard-of-living bubble.
• That conclusion comes from the latest data on credit card debt. It's growing fast, but the problem is bigger than that - and to understand what it means, we have to take a few steps back.
• For the past several years (actually its nearly 10), the average inflation-adjusted total pay of American workers hasn't been increasing. That means we haven't been building a foundation for increases in our living standard. You might be tempted to say that by definition our living standard couldn't have increased, but that's not quite right. Even with stagnant real incomes, we can always live a little better every year through borrowing and pretending that our living standard is still rising, just as it was for decades. (and so we did)
• After stocks collapsed, home prices took off, making us feel rich all over again. So we continued saving less and spending more, creating the illusion that our living standard was still rising. (we called this "resilience" and pundits yelled at us to "never doubt the American consumer - they haven't let us down for 25 years". Frankly the pundits were correct for a long time - but eventually the cows have come home. Here they are - can you hear the cow bells?)
• In 2005 our personal savings rate went negative, but even that didn't slow us down, because our homes were still appreciating - and rising home values meant that household net worths weren't declining (going negative as a nation is a tough thing to do - I mean that takes a whole bunch of people working very hard to spend more than they have. But we're #1 and we can accomplish anything we put our minds to. Such as shopping til we drop - in fact it was even encouraged post 9/11 - "go out and spend" we were told)
• Of course, we don't hear those assurances anymore. Stocks are back where they were eight years ago, and home prices are where they were five years ago. But personal debt is much higher than ever before, and average pay is still going nowhere in real terms. So now how do we live as if our living standard is still rising? (but someone got rich off all this, in a great transfer of wealth - the national GDP was rising at a decent rate all these years - I wonder where all that money went? [note thats a rhetorical question])
• Last year, just as the subprime crisis happened, credit card debt took off. The home-equity ATM had been shut down, so people turned to the last source of easy money they had left, the most expensive debt on the menu, credit card borrowing.
• Since credit card debt has been growing much faster than the economy - more than 8% in last year's third and fourth quarters and over 7% in May (the most recent month reported)- people are apparently using it as a substitute for income. Thus, for the past year or so we have still maintained the standard-of-living illusion. (we never really learn in some cases, and in others people are simply desperate to pay for the basics of life)
• Credit card debt, like mortgage debt, gets bundled, securitized, and sold off by banks. Citigroup (C, Fortune 500), one of America's largest credit card lenders, just reported that it lost $176 million in the second quarter through securitizing such debt. ("they" never learn either do they? risk free credit card debt! Get your risk free credit card debt - hot and ready!)
• More generally, the amount of credit card debt that is securitized nationwide has plunged by more than half in the past five months because it's getting riskier. That means credit card issuers will be charging customers higher interest rates, and since the banks can't offload as much of the debt as before, they'll have less money to lend to cardholders.
• So now what? There isn't much else to borrow against. (that's a problem)
• It may be that the standard-of-living bubble finally has to deflate. Sustainable increases in living standards have to be earned, not borrowed, and that means performing ever higher value work that can't be outsourced. We haven't been meeting that challenge very well; doing so will probably require much more and better education for millions of Americans, which takes time and money.

[Jun 22: Americans Running Out of Places to Hide Debt - Now Credit Cards Go]
[Apr 30: MSNBC - Americans Tapping Attic for Spare Cash]

Please note if you click on the chart to the upper right and view the huge spike in 2nd quarter 2008 savings rate that's an anomaly. You can thank your grandkids for the money (rebate checks) Pundits will tell you the statistics clearly show Americans suddenly found religion in those 3 months ;)

Go short pundits.