Future in the Cards
Posted: August 2008
We love our credit cards; anything we want, think we want, need or think we need, we get. Charge it! Put it on the plastic! It’s not real money – until the next statement arrives via our privatized USPS, reminding us what we bought that we probably don’t remember, don’t use and can’t really figure out why we thought we wanted it in the first place.
American consumer credit card debt is spiraling out of control and savings are running negative. While earnings are nearly flatlined, adjusted for inflation, total revolving credit card debt exceeds $900 billion and is increasing at a staggering 7.4% per year as we, more and more frequently, are using our credit cards to pay for basic food and clothing, school supplies and daily living expenses and are more frequently taking cash advances on our cards to meet routine costs.
More important to the Market and the nation, card delinquencies are on the upswing (albeit coming off historic lows) with quarterly increases of 11-13% and corresponding increases by major credit card lenders, including Citigroup, American Express and BofA, in loan loss reserves. As unsecured debt, these delinquencies represent total losses – no security to fall back on – and wander through the economy, inflicting damage far from the originating lender.
Like most debt today, promised payments on credit card debt have become a quant’s toy, sliced and diced, securitized and sold, masked and hidden under bizarre headings and obscure acronyms. As this debt goes delinquent, the originators pass the damage along to investors, investment banks, hedge funds, private equity and, ultimately, into the general economy. Increasing delinquency on credit cards strikes hardest on the retail sector and that groups increased role as employers, shoving down hard on gross margins and market share. Higher end retailers, the Nordstrom’s and Tiffanies of our world, will feel this pinch later but heavier; low end retailers like Target, Kmart and Sears will report the spending slower soon. Discounters like Wal-Mart, with a relatively smaller portion of sales made on credit cards, may actually benefit as consumers are less able to use their cards and resort to the quaint practice of paying cash.
Delinquencies on credit cards are the next “sub-prime” crisis. After all, what is more sub-prime than a trillion dollars of debt with zero collateral and zero due diligence behind the issuance? Once this silly housing problem stops being the focus of our financial distress, we’ll see credit card problems ooze to the top, igniting a new round of teeth gnashing, lower profits, DJIA slippage and general economic malaise.
Compounding problems for the issuers, long beneficiaries of abusive interest rates, incredibly fraudulent offerings and claims and overtly dishonest practices toward their customer card users will be renewed attention from Washington. Going into the elections and 2009 new-electee energy, expect “populist” politicians to target card issuers over multiple (very profitable) behaviors that victimize Main Street people. Earnings for card issuers, under pressure from delinquencies and overuse already, will take additional hits as many of their most effective revenue generating scams are taken away.
For a nation founded on principles of thrift, frugality and industry, the level of debt associated with credit cards is both staggering and appalling. For an economy that can not seem to function unless the people overspend on useless geegaws and gadgets, it is frightening.
Tighten your seat belts – the future is in the Cards.
