Credit Card Debt & Wages
There are those that argue that the growth in consumer debt - especially credit cards - is primarily due to the wealthy. Even if that may be the case, it does not mean the wealthy have the means to pay off this debt - the fact remains that consumers are overleveraged. I previously made the case that all is not well in the land of consumer credit.
American Express knows this quite well. From yesterday’s WSJ:
American Express Co. reported a 24% plunge in quarterly profit and said it will cut costs and employees as nervous consumers keep a firmer grip on their wallets
Showing that even AmEx’s largely affluent customer base is being increasingly squeezed, the company set aside $1.4 billion for credit losses, up 51% from $905 million in last year’s third quarter. (emphasis added)
So the credit crisis doesn’t stop with home mortgages, CDOs, or credit default swaps. Credit cards are next.
Hilzoy nails it, and finds this useful graph: [via Yglesias]
Wages have been flat for the better part of a decade. We made up for that fact by borrowing, both against our houses and on credit cards. Since virtually every form of credit seems to have dried up, and a large jump in people’s wages doesn’t seem to be in the offing, it’s hard to see how consumer spending will not take a very serious hit. And if it does, the economy will suffer enormously.
As this graph makes clear, our debt has well out-paced any wage growth.
Source: Innovest
They expand:
New credit card issuance will slow down as banks rebuild their balance sheets. This will make it difficult for distressed borrowers to roll bad debts into new low-interest cards. The mortgage crisis is putting unprecedented strain on borrowers. In the second quarter, credit card issuers in states hit hardest by the mortgage crisis saw the sharpest spikes in credit card net charge offs. The 2006 bankruptcy reform will cause credit card charge offs to be delayed. Today’s low charge off rates are only the calm before the storm:delinquencies will begin to fully register as charge offs in early 2009. Credit card usage has spiked because expenditure which used to be charged to home equity loans is now charged to credit cards. We anticipate a commensurate surge in bad credit card debts.
And if subprime borrowers thought their adjustable rate mortgage was untenable and forced them into foreclosure, wait till they see the interest rates on credit cards. This isn’t going to be pretty.
