Credit Card Addicted Nation: How Americans have Pushed Themselves off the Fiscal Cliff. $931 Billion in Credit Card Debt Outstanding.
Credit cards were developed as a form of convenience and not another stream of household income. The first major use in the United States started in the 1920s when it was used for the purposes of fueling the expanding auto owner population. Bank of America created the BankAmericard in 1958 which later became the Visa system. If we rewind to the start of the decade, let us use January 2000 as the date, Americans had $614 billion in credit card debt. Today that number now stands at $931 billion. Now this wouldn’t be such an issue if real wages and savings had increased over this timeframe but the reality is, Americans used over $300 billion in credit card debt to maintain a lifestyle beyond their means. Much of this came in conjunctions with the housing bubble which took three decades to expand.
This has also come from aggressive marketing from credit card companies but also the changing societal landscape. Just think of online shopping. Can you imagine someone sending in a check to purchase an item and actually needing to wait? The instant gratification became a hit when credit cards turned into casino chips. This boom in debt is massive:
As you can see from the chart, Americans started massively going into debt starting in the 1970s and that has continued for decades. The blue line above shows Americans are pulling back their usage of debt at the fastest pace in half a century (actually, quicker if we had data that goes beyond the 1950s). Now this is occurring because the U.S. Treasury and Federal Reserve although bailing out Wall Street and banks, has given banks even more power and money and banks realize that they still have years of bad debt to remedy and are only holding on to funds to fix their balance sheet. End result? Credit growth for the average American is halting by force. As I had mentioned previously credit card companies yanked 8 million credit cards from the system back in February. Now the problem is many Americans view credit cards as a form of wealth or pseudo-income so having their credit reduced was equivalent to a wage cut.
In fact, if we look at bankruptcy filings we will see that in 2005 filings surged because many people wanted to beat the new bankruptcy legislation that would make it harder for people to file:
It is interesting to note that we are now approaching those peak levels on top of having the stricter bankruptcy legislation. Keep in mind 2005 was a supposedly good year. The housing bubble was still going and pseudo wealth was still flowing like a waterfall. Yet an enormous part of this decade was fueled by debt and not actual real wealth. Much of that has been washed away with $13.8 trillion in household wealth disappearing since the recession started and now 26,000,000 Americans are unemployed or underemployed.
Yet the credit card was only the ultimate logical extension of a society fueled by debt. Like those first cards in the 1920s which were used for auto fuel, the modern day credit card was used to fuel the economy. Have you ever tried paying for an item over $500 in cash? If you do or have, it will definitely make you think twice. Psychologically the impact this has is you see what you are actually paying for in real terms. It is very different to swipe a card and be done with it. That is why so many Americans have gotten into massive amounts of debt and have used the credit card to the extreme. Many card companies are now upping their minimum payments from 2% to 5% a month and this slight increase is causing hire defaults.
In fact, defaults are now at their highest point ever:
“(Reuters) * Chargeoff rate rises over 10 percent for the first time
* Moody’s sees chargeoffs peaking at around 12 percent
* Moody’s says bad loans will peak in Q2 2010
NEW YORK, June 24 (Reuters) - The U.S. monthly credit card chargeoff rate surpassed 10 percent and hit a sixth straight record high in May, Moody’s Investors Services said on Wednesday, as unemployment grew to a 26-year high.
The chargeoff rate index — which measures credit card loans the banks do not expect to be repaid — rose to 10.62 percent in May from 9.97 percent in April.”
Now keep in mind it takes months before a credit card company will charge-off an account. That is, some of these people have stopped paying back in 2008. Given our rising unemployment and weak economy, you can expect the rate to rise. The fact that credit is being sucked out of the system will make many Americans feel like they are quitting a hard narcotic cold turkey. This is the final straw that breaks the debt based economy.
The Country that Punishes Savers: Americans Saving 7 percent of Income Putting nearly $800 Billion Annual Rate on the Sidelines. Banks offering 0 to 0.10 Percent to Borrow Your Money.
Americans are increasingly putting more and more money on the sidelines. For the month of May Americans put away 6.9 percent of their income into savings. Not the stock market or real estate but bona fide savings. This is a stark contrast from the zero rates achieved back in April of 2008. When we discussed the new austerity for Americans, much of this is being driven by the loss of jobs and the fact that nearly 26,000,000 Americans are unemployed or underemployed. Now why are Americans suddenly finding the need to save some money? First, the decade long housing bubble has shattered the notion that phantom equity is the same as actual wealth. The next major issue is the stock market is no longer seen as a safe investment. Even if someone had his or her funds in the S&P 500 the index is still down approximately 40 percent and that is after the major rally since the March low.
Something is definitely going on here:
We have never seen such a rapid change in the savings rate. Of course, going from zero anything would be an improvement. The current seasonally adjusted annual rate has not been seen since 1993 but as the chart above shows, the percent of change is unmatched with 50 years of data. What is occurring here? I’ve seen a few articles talking about the new found frugality that Americans are now embracing. This is something I hesitate to agree with because it presupposes that Americans are electing to save as a choice rather than being forced by external circumstances. I do believe many Americans are becoming more frugal by choice but the vast majority are simply responding to the horrific economy that has evaporated $13.8 trillion in American household wealth.
But who are the big winners here? Banks. The Fed shows that deposits at many banks now stands at $7.5 trillion showing the largest increase for the year. These banks are getting insanely cheap deposits from the government and now you to help mend their broken balance sheets. Call it double dipping. Look at how much money is being put into savings:
We have never seen so much money move to the sidelines. We are now approaching an $800 billion SAAR which means, nearly $1 trillion in money is being put on the sidelines. This is good right? Unfortunately the way our economy is set up this means more and more money isn’t out there chasing consumer goods. With massive market volatility this is actually viewed as bad. That is the irony here. Savings should be a good thing yet 70 percent of our economy depends on consumption. Taking out $800 billion from commission will do damage since banks are not lending this money:
So all that is happening is banks are building up their reserves for the second round of hits that will occur with commercial real estate, credit cards, and higher unemployment coming down the pipeline. It is fascinating to note that during the last month more insiders were selling stock than buying. These are the folks smiling on TV one minute telling you everything is okay while quietly dumping their holdings now that the market is artificially propped up.
Let us go on a quick test shall we? Many banks are being bailed out with golden parachutes with diamond pull strings so let us see what kind of savings rates they are offering Americans:
Don’t adjust your glasses or monitor. You are reading the above right. Bank of America is offering a stunning 0.10 percent for your regular savings account. You might as well stuff the money in a mattress! Let us see what Wells Fargo is offering:
If you thought Bank of America was low Wells Fargo is offering a 0.05% rate! You know how much money you would get if you left $10,000 with them for one year? Five stinking dollars! Just for the sake of it, let us look at Chase since they now own WaMu as well:
Say what? At these rates people are saving out of fear and not a new sense of frugality. People figure that it is better to get the service of an ATM card than putting their money into the Wall Street casino or the housing bubble. Oh, but it gets better. The U.S. government through the U.S. Treasury and Federal Reserve do not want Americans to save any money. In fact, they are offering even lower rates:
That is correct. A 0 percent savings rate. And this is all designed by purpose. The Federal Reserve is intentionally keeping the Fed funds rate low so banks can fix their balance sheets and the U.S. can inflate itself out of debt. Yet this is bad news for prudent savers. The attempt is to make every option so unattractive that people have to pump their money back in the stock market that is now operating like a game of blackjack in Vegas. Yet even though we hear about historical low rates, banks are making a ton on the margin of money they are borrowing from the government (aka taxpayers). That is, they are taking in money paying 0.05 percent or whatever it is, and getting 5 or 6 percent on mortgages and taking in 15 to 20 percent on credit cards. Give me access to those kind of terms and I’d make money too.
The bottom line is the government and Wall Street do not want Americans to save. This is reflected in these absurdly low rates. It is easy to encourage savings. Increase the yield on savings accounts through hiking the Fed Funds rate. Yet the U.S. Treasury and Federal Reserve know that their Wall Street friends and our government debt is so large, that we are going to have to deflate our currency and destroy the dollar. Enough with the “strong dollar” policy talk since all actions point to a weak dollar policy.
