American consumers: debt and inflation
In a recent LinkedIn post, personal financial planning guru Richard Archer pointed out that US consumer credit card debt is pushing up against the $1 Trillion mark. Yes, that is a "T" as in "TRILLION". Richard pointed out that with the average interest rate on these cards at over 24% APR, if/when the economy slows, increases in defaults are almost certain. Keep in mind that recent surveys suggest that only somewhere from 46% to 65% of Americans do not pay off their credit cards each month. Many Americans are living paycheck to paycheck and racking up credit card debt in the process.
What is driving this increase in credit card debt? Hint: it is not that the cost of borrowing for consumers is declining.
The answer may lie in another graph from the Fed, this one on real (adjusted for inflation) wages and salaries.
Notice how the two graphs (roughly) line up. In the second quarter of 2021 we see the median real wages and salaries of full time workers fall by 5.6% from the previous year. At about the same time in March and April of 2021 we see the level of consumer credit card debt start to tick upward.
This makes sense: as wages and salaries (adjusted for inflation) are falling, American households are turning to their credit cards to maintain their lifestyle... meaning they continue to eat, put gas in the car, etc. by using plastic. This then helps to explain why the GDP numbers have remained relatively strong: it has been consumer spending. But, it is NOT because they are seeing higher real earnings.
How the Fed gets this wrong.
Which points out (once again) why the Powell Fed is getting this all wrong. Powell and his lackies (including those that head the Dallas Fed and the Minneapolis Fed) continue to argue that interest rates must continue to increase due to "tight" labor market conditions. (That's the old wage-price spiral of the Phillips Curve). But look at that graph of real wages and salaries again: real labor costs are falling or flat. Thus, it is NOT labor costs that are driving inflation.
Rather, it is the LACK of real wage and salary growth that may be pushing UP the amount of credit card debt Americans are taking on.
So...what does this mean for the future?
Will we see an increase in credit card defaults? If the economy slows significantly, it is very likely. Those Americans living paycheck to paycheck will no longer be able to pay even the minimum amount due on their credit cards when they lose their jobs. Thus, they will simply stop paying each month. Defaults will rise.
Will the Powell Fed then claim the holders of credit card debt are "systemically important" and thus require a tax-payer funded (or at least guaranteed) bailout? Very likely. But, don't look for any credit card debt forgiveness. Remember that "pain" Powell said American households must suffer in order to bring inflation down? Look for him to say the same thing about the need for households to suffer in order bailout the institutional investors who have purchased all of this credit card debt.
Ugh...the misalignment of incentives in our financial markets are simply mindboggling.
However there maybe a solution on the horizon. But it may result in a dramatic regime shift in US financial markets. It will catch many US banks completely flat footed.
It called...central bank digital currencies. Chances are Powell has no idea how they work. That is probably a good thing. With any luck the expansion of CBDCs will greatly reduce the use of what we know of today as "consumer credit cards." Unfortunately, we'll have to get through this mess first.
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Comments 2
Do you believe CBDC's are a good thing? From what I have read and heard they will allow the government and the people pushing the New World Order to track our spending and possibly limit what we can and cannot buy.
I think they will prove to be very beneficial for consumer and non-financial firms. For depository institutions (aka "banks") it will, most likely, be a significant tipping point. But, they probably will not realize it until it is too late.
I understand that there are some conspiracy theory proponents out there wo fear a "new world order" that have raised concerns about CBDCs. But, as with most conspiracy theories, the reality is bit more complex, nuanced, and down right boring than there is a secret group that has plans to control the global economy.
The issue is one of security in financial transactions: the way the system works now is based on the old days of handwritten checks and thus it is an old, creaky, systems that could be tampered with by nefarious actors (eg rogue governments, organized crime, etc.). Thus, the launch of things like FedNow.
BTW: with digital currencies your identity will be encrypted so it will be virtually impossible for anyone to tell who you are are when you are buying something.
How this will impact the entire banking system will require a longer post...or perhaps even several posts. Maybe I will be able to put these together later this summer.
More soon,
MWB