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October 21, 2008

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Would it be possible to add a marker to the chart showing the date when President Bush told the nation to "go shopping"?

Since virtually every form of credit seems to have dried up

Is this really accurate? As far as consumer credit is concerned, it is my understanding that credit availability has merely gone back to the way it was before the housing boom. Borrowers can still get loans if they have decent credit and a sizable down payment.

Not that realistic lending standards won't come as a shock to the average consumer, but the emphasis needs to be on the fact that consumer lending standards were allowed to deteriorate so far, not on lamenting the return of sanity to the credit markets.

Would it be possible to add a marker to the chart showing the date when President Bush told the nation to "go shopping"?

How about a marker showing the general release of flat-screen Hi-Def Televisions? Or a marker where gas first went over $3/gallon?

The day of reckoning isn't going to be pretty.

Your graph is labled "Growth in Credit Card debt vs. Growth in wages" The term growth would imply that the graph is graphing the percent change from quarter to quarter? Or is it graphing the total amount of credit card debt vs the amount of wages? There is a huge difference. I find the graph very ambiguous and possibly misleading.

If the amount of debt is now 60% greater, relative to wages than it was eight years ago, that's meaningful and frightening. If the growth in debt this quarter is 60% greater than the growth in debt eight years ago, relative to wages, it could be meaningless.

Borrowers can still get loans if they have decent credit and a sizable down payment

Part of the problem is that not only customers but also many businesses (especially in the retail trade) have become addicted to easy consumer credit. IIRC there was a story on calculatedrisk several months back about how the credit card default crunch doesn't just mean Visa and Mastercard, etc., it also involves store cards which were lavishly handed out by a certain retail discount chain to pump up sales without regard to the anticipated default rate. Oops.

It gets no better on the Visa/MC/Amex side. The credit card issuing banks currently have no way of forcing a consumer to make a cash down payment as a necessary requirement before being allowed to use a credit card to cover the remaining amount (the protocols for obtaining a credit card authorization don't include data like what other payments are involved), so trying to control the supply of credit on that end isn't going to be very workable - instead the merchant will have to impose that requirement at the point of sale.

And while the merchant requiring a down payment is easy for durable goods like cars or even flat screen TVs, there is a large class of smaller consumer purchases for which there is currently no easy and common point of sale process involving a down payment.

How is a store going to take a down payment on a pair of blue jeans? Or food at the grocery store? Yes it can certainly be done, by reprogramming the cash registers to make mixed tender transactions easier to process and then retraining the staff, but that takes time and imposes an additional expense on businesses which are already feeling the pinch. This adaption is going to be very painful.

@Oyster Tea

My interpretation of the graph is that it is showing the total amount rather than the rate of change on the Y axis. I think the term "growth" was used because both the wage curve and the credit card debt curve were renormalized to set their respective 1999 Q1 values = 100, so they don't show absolute dollars amounts but rather total amounts relative to the value of that starting point.

Also, I don't think the graph should be taken to imply that in 1999 Q1 total wages and total credit card debt were equal.

TLT, if a consumer defaults on their credit card, the retailer won't feel the pinch, the issuer of the card will.

When the retailer settles their credit cards after the store closes, they get paid at that time, electronically. At least that's the way it works where I work.

Oyster Tea: Sorry, I forgot to put the link for the graph. It's there now. In any case, I took the phrase 'credit card debt outstanding' to mean that that was the amount of debt, not the rate of growth. This article from MSNBC claims that "Outstanding credit card debt has grown by more than 75 percent since 1999".


When the retailer settles their credit cards after the store closes, they get paid at that time, electronically. At least that's the way it works where I work.

The messy reality which happens behind the scenes is a bit more complex than that, but basically, yes this is correct, assuming there are no chargebacks involved.


if a consumer defaults on their credit card, the retailer won't feel the pinch, the issuer of the card will.

Yes but that is exactly the point I was making in replying to now_what's observation at 10:59pm that consumer credit can still be extended with care espeically if the default risk is hedged by requiring a down payment on the purchase.

I replied by pointing out that while this may help with durable goods purchases, the use of down payments as a hedge against consumer credit default won't work in a non-durable goods point of sale environment because the down payment would taken by one party (the merchant) and the risk of the consumer defaulting on the debt generated is taken by a different party (the financial institution which issued the credit card).

So all of the default risk is taken by the latter party - so far so good from the point of view of the merchant. Or so it seems until that customer has their credit limit knocked down on their card (or the card is simply cancelled altogether) because the issuing institution has no other way to hedge the risk of default, other than by cutting them off completely.

Then, no more credit = no more customer. Now the merchant is hurt because customers who have enough cash to make a partial down payment but not enough to complete the transaction can no longer make purchases until they have saved up enough cash to pay 100% of the price - it is a return to a pure cash and carry economy. That shrinks the customer base of the merchant, which means the thinning of the herd begins in earnest on the merchant side of the equation.

This is what happens when retail customers can't use credit cards to buffer their cash flow:

Now more than before, Walmart shoppers living from paycheck to paycheck

in a "disturbing" trend, Castro-Wright said Wal-Mart for the first time is seeing a paycheck-related spike in sales of baby formula, suggesting consumers are rushing to buy such necessities as soon as they have the cash.

h/t Paul Kedrosky

Another thing banks are doing is increasing interest rates on credit cards that *aren't* bad, in hopes of increasing their cash flow. Of course, this also makes those credit cards harder to pay off, which in turn increases the default rate. I had one credit card go from 8.9% to 19.9% within six months despite no change in my underlying credit score and no lates or defaults on any payments. I paid it off, but how many people are living paycheck to paycheck and would not be able to do so?

- Badtux the Finance Penguin

Since the graph only shows the growth of wages vs the growth of debt, it's hard to actually judge how bad the situation is. If, for example, in 1999 my credit card debt was 1% of my income and now that has increased 60% while my income has remained the same... my debt is still only 1.6% of my income. That's hardly cause to start watching Mad Max to educate myself on how I will relate to people in the future. Also, online shopping increased in popularity over the same time which pretty much necesitates putting those items on your credit card. I know my credit card debt at any given time is way higher right now then in 1999, but I charge almost all of my monthly expense to my CC and pay it off every month. Paying by cash and check has certainly decreased over the past decade... I dunno... I'm sure it's bad, but how bad really? I don't personally know of anybody who is drowning in credit card debt, or used their home equity to fund trips and boats...

Well, Lance, since defaults are going up sharply, one would have to conclude that's because people can't pay the bills. Which would be one definition of "bad".

Anecdotes from your friends and acquaintances will give you some good stories, but not much data.

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Whatnot


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