Wednesday, March 18, 2009

We haven't hit bottom yet

Unfortunately, it is true.

People keep saying, "Well how will we know when this recession has hit its peak? How will we know when we've hit bottom?"

The answer, I believe, is when the other credit crisis occurs.

Reckless lending practices and living beyond our means got us into this mess in the first place. I too am guilty of living beyond my means. We've all got a little debt. Some have more than others. Most people would consider their debt manageable.

With the country hemorrhaging jobs for the last 12 months, a credit aftershock has yet to be felt. If the housing and manufacturing crises registered an 8.0 on the Richter scale, the upcoming aftershock could register as high as a 5.0. That of course could derail any progress we've made in the meantime.

What happens when people lose their income? They must rely on savings and credit cards. Sometimes, their savings were dependent on stock portfolios and other variable accounts like 401k's-- many of which have gone down the dumper recently.

So this fictitious, yet common individual has some savings left, maybe a little severance (maybe not), and the same bills that he or she was paying when he or she was employed.

Assuming this person cannot land a similar job with similar pay in the next 2 or 3 months, they will have to make some choices. For an increasing amount of people, credit cards are the default answer.

Most of us have them... many have more than two. According to CreditCards.com, there were 1.5 billion credit cards in use in the US in 2006. That number has only increased. With the average consumer owing on 13 different credit obligations (myfico.com) and 60% of the population owing an average of $9,000, people losing jobs en masse can only spell disaster.

They are convenient. They allow great financial freedom. They serve well in emergencies and can help you out of jams.

They were not, however, made to support entire families for extended periods of time. The more desperate the employment situation gets, the more personal debt in this country is going to skyrocket.

And who owes money to who, you may ask?

Heading the top of the list is the relatively stable JPMorgan-Chase with 119.4 million cards in circulation (2008), that is followed by Citibank (92 million) and Bank of America (80.2 million). So B of A and Citi have 172.2 million cards out there, huh? Not very comforting at all.

The thing that's scary about this whole situation is that the American people are racking up necessary debts at alarming rates right now, and less money is going into these banks in the form of remittances. I can't say I'm an expert, but this seems like another serious cash flow problem for these already hard-hit banks.

We're talking about serious numbers here. The US Census Bureau determined that Americans had $832 billion in credit card debt in 2005, and at the time predicted a rise to $1.1 trillion in 2010. And of course, despite their disturbing findings in 2005, they did not factor in the deep recession that we are currently mired in.

The amount of debt floating around out there is only set to increase, with it being the only significant lifeline for a growing segment of the population.

Hopefully frugal spending by those with jobs during these uncertain times will help offset part of the growing debt problem, but that remains to be seen.

The Federal Government, ever the shining example of fiscal responsibility, is basically replicating the aforementioned process on a much larger scale... And just like many credit card issuers are doing by raising interest rates and transaction fees, the government will have to raise taxes. Again, it's a simple overextension of credit and a subsequent cash flow issue.

I hope I'm wrong about this, but I don't think I am.



Thanks for reading, and please leave a comment every once in awhile! I need to know if I'm nuts or on point!

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1 Comments:

OpenID Emily said...

You make a really interesting point that I honestly hadn't thought about. I'm sorry to say it (because it will suck), but I think you're absolutely right on this one. The fact that people had already been living beyond their means before this huge blowup even happened doesn't bode well for a future in which living off credit cards appears to be the only viable option for some. I doubt that the majority of people who have already charged themselves into a lifetime's worth of debt will be quick to learn to change their spending habits... But maybe I'm being too pessimistic. Let the government lead the way! (Ha!)

Sunday, March 22, 2009  

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