Credit card debt: Back to the bad old days?

The Federal  Reserve published its monthly G.19 statistical release of consumer credit on  Feb. 7, and, as many expected, it revealed another uptick in household  borrowing. In December alone, the month the figures covered, it rose at an  annualized rate of 9.3 percent. At the end of 2011, we as a  nation owed some $90 billion more than we did at the end of 2010.

Revolving credit, which is virtually all credit  card debt, had fallen in 32 of the previous 37 months, but was up again in  December, the third consecutive monthly rise. As with the wider consumer credit  measure, after two years of successive and significant falls (9.6 percent in  2009 and 7.5 percent in 2010), credit card debt actually rose very slightly between  the start and end of 2011.

Problem credit card debt returning to haunt us?

How worried should we be by rising consumer debt? Unsurprisingly, some think  we should be positively petrified. Writing in The Hawai’i News Daily on Feb. 5  (before the latest Fed figures were released), Michael Snyder’s predictions were  positively apocalyptic. Under the headline “The financial crisis of 2008 was  just a warm-up act for the economic horror show that is coming,” he argues that  nothing’s changed for the better since the credit crunch, and that among the  systemic problems that remain is credit card debt:

Making a beeline for recovery?

Snyder makes a persuasive case for the financial meltdown he predicts.  However, the late John Kenneth Galbraith, a celebrated (by some) Harvard  economics professor, put such apocalyptic visions into context back in 1952 in  his book “American Capitalism.” On the first page of that volume, he drew an  analogy between the American economy and a bee: “It is told that such are the  aerodynamics and wing-loading of the bumblebee that, in principle, it cannot  fly.” But it does, and for way more than 60 years our economy has been flying in  practice (with periodic soars and plummets), even though there are countless  theoretical reasons why it shouldn’t.

And not all the news is bad. January’s edition of McKinsey Quarterly,  published by the eponymous management consulting firm, included an article that  explored how the United States was deleveraging household debt by comparison  with some other advanced countries. And, generally speaking, we’re doing much  better than those others. The U.K., for example, has reduced that measure by 6  percent since it started the process, and Spain by 4 percent. The United States  has achieved a remarkable 11 percent. Meanwhile, unemployment in both those  European nations is on an upward trend while here, happily, it’s decidedly  not.

Moreover, the news in this country is even better for the debt service ratio.  That, according to an OECD definition, is “the ratio of debt service  payments (interest and principal payments due) during a year, expressed as a  percentage of exports (typically of goods and services) for that year… a key indicator of a country’s debt  burden.” And McKinsey says that, for U.S. households: “it’s now  down to 11.5 percent — well below the peak of 14.0 percent, in the third  quarter of 2007, and lower than it was even at the start of the bubble, in  2000.”

Or taking the road to ruin?

McKinsey’s household debt data include borrowing tied to real estate such as  mortgages and home equity lines of credit, while the Fed’s consumer credit  figures don’t. So they’re not immediately comparable.

That partly explains why McKinsey published a graph showing US household debt  as a percentage of gross disposable income. This suggests a smooth downward line  over the past two or three years, and then a dotted line on pretty much the same  trajectory showing a projection that takes us to the second quarter of 2013, by  which time we’re supposedly going to be back on trend after the inflation and  bursting of the credit bubble. That paints a soothing and reassuring  picture.

However, if you look just at student loans, credit cards, auto loans and  other consumer borrowing that isn’t secured on housing, then things look very  different. So how worried should we be?

Who knows?

Well, the simple fact is, nobody knows. Not many mainstream economists share  Michael Snyder’s doom-and-gloom prognosis, but that means very little. Remember  the last time mainstream economists smugly believed they had all the answers?  You don’t have to think back further than 2007/8. And, at the risk of irritating  regular readers with the repetition of this blogger’s favorite J.K. Galbraith  quotation: “The only function of economic forecasting is to  make astrology look respectable.”

What we can do is look at three recent nuggets of news that tell us something  about the real world today:

  1. “Loan balances for six of the country’s largest credit-card issuers are set  to grow this year for the first time in four years, as consumer  confidence rises…” — The Wall  Street Journal, Jan. 17, 2012
  2. “Uptick In Card Loan Losses In View” — headline in Collections & Credit  Risk, Jan. 20, 2012
  3. “In October 2011… monthly subprime bank credit  card originations were up 22 percent over October  2010 levels.” Equifax  press release, Jan. 30, 2012

You might have noticed that every single headline and subhead in this blog  ends with a question mark. That’s because your blogger shares one single  characteristic with every world-class economist on the planet: he hasn’t the  faintest idea what’s going to happen to the economy tomorrow, let alone in six  months’ time.

But he would suggest to anyone who’s feeling relaxed about their finances and  tempted to run up significant levels of credit  card debt that they should, unless they’re keen gamblers, think again.

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