The Ultimate Question Remains the Same – Where Will the Money Come From?

Thursday’s Wall Street Journal reported that Consumer Retail Spending dropped .3% in August. At the same time, credit card debt in the US rose in the 2nd Quarter for 2016 in the amount of $34.4 billion, which is the largest gain since 1986. Sales declining while debt increases surprise me. I understand why credit card debt is up – the banks are pushing credit cards again like they are the hottest commodity since bubble gum (sliced bread is too long ago!). The ability of consumers to resist can only last so long. If a family has been living paycheck to paycheck for an extended period, with no additional cash to make discretionary purchases – yet alone to pay for essentials for themselves and their children – there comes a time when the barrage of offers of credit cards boasting interest free periods, cash back and awards, etc., is too much to bear and one relents… and accepts the card. At first, the plan is to only use it for an emergencies and then to pay it off right away– but as they say, the best-laid plans only go so far, and before one knows it, the balance is up, the interest free period is over and the pain and misery of paying 29% interest begins anew.

While there is no upside to the family problem that will arise from the debt increase, one saving grace that I often comment on is that the increase in Consumer Credit nationally leads to increased spending– and increased spending drives GDP for the economy and growth is what creates jobs.

So here lies the conflict: if credit card debt is ramping up at an alarming rate, it should be translating into increased consumer spending. The problem is– at least based on this month’s report in the Journal– retail spending declined. If that’s the case… where is the money going? I think this month was a burp. My guess is that you will see Retail Spending increase in the next 3 months– and it will be greater than last year– as a result of the expansion of credit cards by the banking industry. When this happens, you can expect the politicians and some economists to applaud the increased spending and profess optimism that GDP will increase. They will, however, ignore the major point: that the growth is at the expense of the families that have increased their debt burden.

The ultimate questions remain the same: “Where will the money come from to pay the debt?” Do you think people who end up with credit card debt of $40,000 and more, at 29% interest, will be able to pay it off when, in truth, they did not have adequate cash flow when they incurred the debt? The banks would say yes; they can pay their minimum payments over 20 years and all will be fine. The problem is that if the families do that, they will retire broke and the 29% interest over the 20 years will ruin their financial future. Once in the credit card trap where all available cash goes to pay the minimum payments mean you never get out of debt, because you have to continue to use the cards since you have no cash left, month to month after paying your bills. Fortunately for some, we know how to help people get out of the trap and eliminate the debt. The fix for the economy is a bigger problem. We need growth, but not on the backs of the consumer.

So the next time you hear someone compliment the growth in the economy, ask them, “If the growth has come from the expansion of consumer credit, where is the money going to come from to pay the debt?”

Have a great week. Be sure to check out our upcoming seminars.