The willingness and ability of consumers and corporations to take on ever increasing amounts of debt is an essential piece of today’s fiat monetary system. Therefore, I can only imagine the concern of those in power, when they see the sluggish growth in revolving credit during the post-financial-crisis years.
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As the chart below shows, from the start of the Great Recession through early 2011, revolving credit plummeted. And since that time, growth has been slow.
In 2011, revolving credit grew 0.2%. The following year, 2012, growth was 0.4%. In 2013, growth checked in at 1.3%. The most recent data for 2014 showed a 0.3% decline in January and a 3.4% decline in February. This contrasts sharply with the experience coming out of the 2001 recession (shown in the chart below).
To further emphasize how this time is indeed different, here’s a look at the experience coming out of the recession that preceded the 2001 recession (beginning in July 1990).
Keep in mind that revolving credit growth is an indication that people are using credit cards. In some cases, they use those credit cards to enhance near-term purchasing power. While it is true that people avoiding credit cards could be indicative of a healthier consumer, it could also be indicative of a changing psychology among Americans. Regardless of whether slow revolving credit growth is the result of a healthier consumer, changing psychology, or both, if everyday people’s joie de vivre no longer involves taking on debt to buy more stuff, it will have long-term implications for a credit-dependent economic system. After all, cash on hand is simply not enough for most people to spend the way the U.S. economy would require if fast-paced growth were in the cards.
If the trend of cautiousness toward credit cards continues, and the Fed is truly interested in strengthening the demand for goods and services, it may be wise to consider backing off the policy of trying to make life more expensive for everyday Americans. Put yourself in the shoes of a consumer who has made the decision to exercise caution when it comes to future spending. Are you more likely to purchase ever more goods and services as things become more expensive?
Even if everyone’s inflation experience is similar to what the CPI suggests (not likely), and everyone is fortunate enough to have at least a small amount of real wage growth, the Fed’s inflationary policy may not be what is needed in today’s economy. The fact that inflation outpaces the interest on a person’s cash available-for-spending, combined with the psychological effects of wanting to rein in spending but struggling to do so because of inflation, there is perfect recipe for buying fewer goods and services. Of course, there are always exceptions to the general rule. But in the case of today’s bifurcated economy, the overwhelming majority of people do not fall in the camp of experiencing strong real wage growth and outlandish gains in retirement portfolios. If the Fed is interested in promoting an environment that helps the majority of people over the long term (short term pain for long term gain), the current inflationary policy is worth reconsidering.
In the near future, I will share some thoughts on non-revolving credit.
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