Credit Cards and American Consumer Debt

Household debt has now exceeded the national debt of the USA – what does this mean, this means that the people who live in America, you and me, owe more money to companies (particularly banks) than the entire government does to other countries!!!!

This figure is incredible but how has debt spiralled so far out of control. The average American family owes more than $16,000 on credit cards, many only making minimum payments. With some credit cards charging exorbitant “loan shark” style interest of 39%, late payment fees, partial payment fees etc etc credit card companies are able to double their money annually! This is quite possibly the most rewarding part of thew whole financial system for banks. The majority of hedge funds do not produce mid to high double digit returns – for mainline banks this is a n incredible pipeline that they will continue to milk until America wakes up.

Minimum payments (around 4% on average) will require 15 or more years to pay off if no further charges are made to the card. This is with a more normal 19.98% apr.

With the Universal Default Clause your credit card company can change your interest at any time for almost any reason, your debt is too high with another company, you were late on your mortgage payment etc etc. This is one of the scariest and most open ended, open to abuse clauses in the American legal system as it exposes more than 1 billion card holders, yep 300
million Americans with an average of 3 cards each, to the whim of the card company. Should you choose to retaliate in any fashion they deem unfit to this injustice, there goes your FICO score.

Meanwhile whilst on the topic of FICO scores, this number has become more critical than ever before as now it holds the key to how high your charges on your mortgage will be. Fannie May et al will be charging higher fees and possibly require higher down payments from “sub prime” borrowers. This means anyone with a 680 or less is going to be dinged – i believe on a sliding scale.

Copyright Jonathan Rose 2007 – Creative Commons License

This work is licensed under a
Creative Commons Attribution-Share Alike 3.0 United States License.

Credit Card Credit Crisis

It is only a few month since I was discussing the impact of credit card and consumer debt on the economy and that everyone saying American Express etc would not be impacted by the sub prime meltdown was crazy. If you aren’t paying your mortgage and are establishing bad credit , why would you pay your credit card bill. If you are going to go bankrupt as a method to protect any money you do have, why not throw the cards in it.

It is unfortunate too reflect that Greenspan’s reduction of interest rates was so extreme to recover the markets in 2001-2003 that another bubble came about. No one believed interest rate would rise ever again and they would never have to pay more interest on their principal. This short term-ism is rife throughout society and is probably one of the most significant parts of this crisis. America demands instant gratification.

Bankers looking for short term gains, their year end bonuses more critical to their lives than the long term business profitability. This is why renumeration is so important and has to be reviewed more carefully. The requirements placed on CEO’s for short term stock market gains are compounded by the fact that businesses take time to change and may not necessarily benefit from the constant demands of shareholders for faster and faster growth.

This always brings me back to the anomally that is Google. With its valuation climbing past $200bn with only $4.23bn of profit on about $10bn in revenue. The price has taken into account all possible growth for the next 5-10 years. Brin and Schmit should be selling stock like crazy and investing in someone like Microsoft with a similar company valuation but over $50bn in revenue.

Which brings us full circle, analysts are all telling you:

1) Bank stocks look cheap, buy them now!!!

I say don’t bother, they still haven’t priced in the full extent of the crash yet as no one realizes how bad it will be.

2) Credit card company stock has been adversely affected by the housing crisis and is unfairly impacted.

I think not, they are the next to topple in the house of cards. This also has a very bad knock on impact to GM and Ford who really are a credit company now more than a car manufacturer. Expect Ford to weather the storm better on strong European sales, bt neither will be doing well in the medium term.

3) Flight to gold for safety

I think not, $800 plus is unsustainable long term and whilst you might see $900-1000 in short term hysteria, long term expect somewhere around $500.

4) Oil at over $100 a barrel.

I think this is price gouging, whilst supply is not indefinite, $65-70 per barrel is a real figure. The answer is to force manufacturer’s to sell fuel efficient diesels in the US and the work on hydrogen powered cars and a distribution network that will allow them to become popular and utilitarian!

Overall expect a global depression of epic 1929 proportions, position yourself to weather a storm. Also ho0pe that Bernanke doesn’t continue with his insanity and hope that the cutting has stopped, even a 1% interest rate cannot shore up the economies current messes at some point we have to turn into the storm and ride through it, perpetually running in front of the wave means it grows larger and larger making it scarier and scarier to turn into it and get through to the balmy waters on the other side.

Copyright Jonathan Rose 2007 – Creative Commons License

This work is licensed under a
Creative Commons Attribution-Share Alike 3.0 United States License.