The Ticking Credit Card Time
Bomb
Peter Schiff
May 9, 2008
For those holding out hope
that the American economy can miraculously avoid a long and deep
recession consumer credit is often viewed as the wonder drug
that can cure all manner of economic ills. As such, this week's
report showing $15 billion growth in consumer credit was widely
heralded as proof of America's economic strength and resilience.
However, we are now suffering the after effects of too
much debt, and our salvation cannot be found in more of the same.
Credit card debt, which now stands at whopping $957 billion nationally
(approximately $3,000 for every citizen) has, in recent years
taken on a different role in American life. While in the past
cards were used primarily to purchase big ticket items, spreading
out costs over many months, they are now increasingly used to
bridge the gap between cost of living and the diminishing purchasing
power of Americans who have been taxed mercilessly by inflation.
By buying with available credit instead of unavailable cash,
consumers are not simply postponing the pain of higher prices,
but compounding it by adding interest to the cost of everyday
purchases. In addition, as home equity credit is now unavailable
to fund large purchases, many consumers are turning to non-deductible,
higher cost credit card debt as the last remaining life line.
As such, credit card debt compounds steadily, and for many borrowers,
becomes increasingly impossible to pay down.
The statistics tell the tale.
According to Equifax, a credit card analysis firm, people have
been buying more with their credit cards but paying down less.
As a result average balances jumped nearly 9% in 2007 and delinquency
rates recently hit a 4-year high of 4.5%.
Also, the reliance on credit
cards is preventing some of the markets salutary forces from
working. With credit always an option, domestic demand remains
strong despite rising prices. Absent the option of putting
more costly gasoline on their credit cards, Americans might have
actually been forced to cut back on their consumption, taking
some of the upward pressure off gas prices.
It should be painfully obvious
that expanded consumer credit is not evidence of improvement,
but simply, deterioration. Unfortunately, when it comes to understanding
the economy, there is little common sense on display. By
going even deeper into debt just to make ends meet, American
consumers are digging themselves, and our entire economy, into
an even greater economic hole and laying the foundation for the
next major credit debacle. It's fitting that just as both Treasury
Secretary Paulson and JP Morgan CEO Jamie Dimon declared that
the worst of the crisis has past, we are on the verge of kicking
the whole thing into a much higher gear!
My guess is that many Americas
continue to run up massive credit card debt because they have
little intention of every paying it off. Since many who
are underwater on the home loans, and behind on the auto and
student loans see bankruptcy as a foregone conclusion, they see
no downside to pilling on as much debt as possible while the
taps remain open.
Those choking on credit card debt may also be taking cheer from
the gathering government campaign to bail out over-leveraged
homeowners. The sheer numbers of who are afflicted with spiraling
monthly payments will make credit card relief a potent political
issue for crusading Congressman and Presidential candidates.
After all, there are few fundamental differences between those
who borrowed too much to buy houses and those who made the same
mistake with consumer goods. If the government bails out
the former why not the latter? In fact, one reason
some homeowners have such large mortgages is that they consolidated
their credit card debts into their mortgages each time they refinanced.
Why should renters be forced to pay off their credit card debts
while homeowners have theirs forgiven?
Soon, as credit card delinquencies rise and losses on pools of
securitized credit card debt mount, those supplying the credit
will finally get wise to the fact they will never get their money
back. As a result the market for such debt will dry up
even more quickly than did the market for subprime mortgages.
Cards will therefore be much harder to come by and will have
much lower limits then they do today. Limited to only the
cash in their wallets, Americans will finally be forced to dramatically
curtail their spending, and the recession will finally gather
serious momentum.
***
For a more in depth analysis
of our financial problems and the inherent dangers they pose
for the U.S. economy and U.S. dollar denominated investments,
read my book "Crash Proof: How to Profit from the Coming
Economic Collapse." Click here
to buy a copy today.
More importantly, don't wait for reality
to set in. Protect your wealth and preserve your purchasing power
before it's too late. Discover the best way to buy gold at www.goldyoucanfold.com, download my free
research report on the powerful case for investing in foreign
equities available at www.researchreportone.com, and subscribe to
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newsletter.
Peter Schiff
C.E.O. and Chief Global Strategist
Euro Pacific Capital, Inc.
1 800-727-7922
email: pschiff@europac.net
website: www.europac.net
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Mr. Schiff is one of
the few non-biased investment advisors (not committed solely to
the short side of the market) to have correctly called the current
bear market before it began and to have positioned his clients
accordingly. As a result of his accurate forecasts on the U.S.
stock market, commodities, gold and the dollar, he is becoming
increasingly more renowned. He has been quoted in many of the
nation's leading newspapers, including The Wall Street Journal,
Barron's, Investor's Business Daily, The Financial Times, The
New York Times, The Los Angeles Times, The Washington Post, The
Chicago Tribune, The Dallas Morning News, The Miami Herald, The
San Francisco Chronicle, The Atlanta Journal-Constitution, The
Arizona Republic, The Philadelphia Inquirer, and the Christian
Science Monitor, and has appeared on CNBC, CNNfn., and Bloomberg.
In addition, his views are frequently quoted locally in the Orange
County Register.
Mr. Schiff began his investment career as a financial consultant
with Shearson Lehman Brothers, after having earned a degree in
finance and accounting from U.C. Berkley in 1987. A financial
professional for seventeen years he joined Euro Pacific
in 1996 and has served as its President since January 2000. An
expert on money, economic theory, and international investing,
he is a highly recommended broker by many of the nation's financial
newsletters and advisory services.
321gold Ltd
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