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The credit card collapse - Secret danger?
November 9th, 2008
The domestic economy and the job market are inextricably linked. As the credit crunch spreads, everyone’s little rectangular life raft is under threat.
Credit defaults have gone through the roof, and the credit card industry has unpaid debts which are now approaching $1 trillion.
Another $2.2 trillion has been spent on cash advances for purchases.
That’s $1 trillion it really needs, right now. Lending is complex, and if greed is a word you can expect to hear a lot, not having that $1 trillion means lenders can’t lend, unless they have money coming in to cover their loans.
Defaults on credit debts have been booming for the last year. Banks have been making big provisions for losses, but obviously, when you’re talking about trillions, it’s undermining the system.
The actual value of increased credit was up 26% on last year. That reflects a need for money, more than spending and maxing out the credit card.
You guessed it: Rate rises are a real possibility.
People are spending money the banks don’t have. Just to complicate things a bit, there are an average of ten credit cards on the market for every person. Some people pay for their cards with other cards, but that’s pretty much a merry go round, and it actually adds charges for the transactions.
So debt is paying for debt.
Savings have also been reduced. Easy credit was one of the big warnings of the pre-boom era, so it’s not that simple for people to get out of debt.
Nobody wins in a scenario like this. For business, it’s bad, because lack of disposable income is a killer of sales. That affects the whole business chain, from suppliers to manufacturers to wholesalers to retailers.
That instantly affects jobs, within a month of a downturn in business. People are laid off to stop outflow of capital. The lack of business then spreads to other industries.
The current theory is that it takes ten full time jobs to create one service industry job, but the equation in reverse could be something like losing five full time jobs costs one job in service industries.
You can see where raging credit card defaults become dangerous.
There’s only so much a credit card can do to create business.
But as a destroyer of business, $1 trillion of trouble to lenders isn’t good news for anyone. The banks have to clean up the mess. Borrowers may have shot themselves in the foot, too, because credit ratings are unforgiving things.
Meanwhile, the problem is having another side effect.
People aren’t buying.
Retail sales are lousy, globally.
Since the housing bust, domestic spending has gone way down, around the world. Obviously people are trying to budget, and reduce outlays.
The credit cards, as far as anyone seems able to figure out, are being used on things like groceries and bills. That says something about the current economic situation, where the credit cards are covering shortfalls in budgets and lack of savings. So people are running on the rims.
Economics is a tough science. It’s often a matter of finding the right indicators.
At the moment, it looks like the indicators are finding the economics.
If everybody’s being a bit wary about making predictions, there’s a good reason for that.
Nobody’s too sure what the current economic situation will do, or even what it can do.
The retail credit industry didn’t exist during the Great Depression. It’s hard to say what negative effects it can cause, but the indicators are now showing some real threats.
The job market is the first to feel those threats. Business and jobs are completely co dependent.
Jobs create and build business. Jobs make capital, and they support investments. Jobs create demand.
Wages pay for the domestic economy on a daily basis. They’re the fundamental support in traditional economies, and it’s now obvious, thanks to the credit card cringe, that they have a serious macroeconomic impact in the new economic models.
The credit card situation is a job killer. The big defaults are also hurting lending further up the food chain.
Previously business borrowing was supporting employment markets. Debt is now costing jobs, not creating them. The downturn in business is now affecting the global economy.
Declare peace on the world, keep your credit card under control.
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