The Next Arc Down

| June 11, 2007

Flaming Credit Cards - Your Doom Calls You

Frequent readers of this Blog know that I have been using a new kind of software to help track hidden aspects of the business cycle, both for our customers and for my own interests. The working theory here is that the data you can get from government and industry reporting agencies are no longer inherently honest – that they are perhaps a bit cooked to lessen the down side and the up side. Not because of some vast Illuminati / Freemason conspiracy, but because it makes good business and political sense for them to do so. That was one reason for creating systems like Hardtack – to report the numbers and let you make up your own mind if they are good or bad for you and your families.

We have already reported on the housing market, and the mortgage melt down in what has been called “Sub Prime”, and the next shoe to drop being “Alt-A”, typically high value loans or other situations that took it outside the conforming funding limits. While these future trends will provide a nasty drag on an otherwise good economy, the real rot lies with a fundamental re-training and re-conditioning of the US consumer over the past decade or so. To put it bluntly – consumers no longer spend according to their income, but according to their credit lines.

This has lead to an enormous expansion in consumer credit, and most families no longer budget to spend the amount they make minus a percentage set aside for savings. Rather they look at how much the can afford to spend each month servicing debt, and they spend until they run out of debt service money.

If you ever wondered how people were affording new Hummers, 3 week vacations to Fiji every year, this can explain it. If you are a throw-back and set aside at least 10% of your income for saving and spend the rest, you may have wondered what you were doing wrong.

Enter the housing boom. The housing boom (or bubble) could never have gotten to where it has without it’s power supply – a huge bloated bubble in credit. During the height of the madness people were outbidding each other on properties $600K and up. Not an army of lawyers, doctors or .com millionaires, but regular working people. They would only do this because they had very little “real” money of their own in the game, and they had financing that would let them afford the monthly payment or a while, and get the house they always wanted.

Meanwhile, people who bought before the craziness were encourages to leverage their property, extracting cash for whatever reason; rational or hedonistic. A case in point – one of my neighbors has decided to sell his house. It’s a nice little house in a nice little area. He bought it in the mid 90’s for around $120K. Now it is on the market for $390K, which seems to me to be an amazing price for 1200 Square Feet of California. He has been on the market a month with no serious offers. If he were eager he could lower his price, but sadly he cannot. He is mortgaged and HELOCed up to over $350K.

This is no different than seeing consumer spending soar month after month several percentage points faster and higher than income growth. When you see that, you know the American public is taking on more debt.

There is only one way this can end – badly.

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Category: Credit Backlash, Main, Recession Watch

About the Author ()

Bruce Henderson is a former Marine who focuses custom data mining and visualization technologies on the economy and other disasters.

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