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XMFSinchiruna (27.46)

Peter Schiff - The Ticking Credit Card Time Bomb

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May 12, 2008 – Comments (7)

As long as we keep piling on the credit, we're pouring salt into the economy's wounds.  Paulson and company will have to move to a far-away land to avoid the shame that he will endure for declaring the worst is over.  Hogwash!  I have been scouring every single tidbit of macroeconomic news to emerge over the past 24 months, and most of the news in the years preceding, and based on the entirety of the evidence I can unequivocally state that A.) the present financial crisis remains in its infancy; and B.) the market has not even come CLOSE to pricing in the reality of the present situation, let alone what is in the pipeline.  Seriously, folks, where is the logic in a 13,000 DOW given what we know?  The markets continue to take 'irrational exuberance' to new extremes.

The effects of the credit card crisis has thus far been largely swept under the rug.  Both the Fed and the BOE have been issuing loans with credit card debt as collateral, without identifying the recipients.  The data we do have on default rates rising and total outstanding credit figures soaring... these should be sobering developments to the Foolish investor.  People are living on their cards, and this is a game that has no winners.  You can sweep crumbs under the rug, but you only end up with rats.

The Ticking Credit Card Time Bomb
by Peter Schiff

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 new book "Crash Proof: How to Profit from the Coming Economic Collapse." Click here to order 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 my free, on-line investment newsletter at http://www.europac.net/newsletter/newsletter.asp.

http://safehaven.com/article-10206.htm

7 Comments – Post Your Own

#1) On May 12, 2008 at 11:23 PM, EScroogeJr (< 20) wrote:

A 9% increase in credit card debt is nothing. About 6% of that 9% is simply inflation, another 1% is rational people taking on more levrage to make use of the investment opportunities produced by the market panic, 1% is extra spending in anticipation of the tax gift from Bush, and maybe 1% is people who intend to never pay it back.

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#2) On May 13, 2008 at 2:16 AM, abitare (39.45) wrote:

FYI - If you like Peter Schiff
. I have a couple of his videos posted. He is a Ron Paul supporter also.

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#3) On May 13, 2008 at 6:41 AM, XMFSinchiruna (27.46) wrote:

EScrooge, you're right about this:  a 9% jump is nothing... but that was the 2007 increase.  The time bomb will hit as credit card use expands further in 2008 and 2009 just as inflation takes off and interest rates on cards rise.  Combine that with dwindling income in nominal terms as people getting laid off take lesser-paying jobs out of necessity, and throw in dwindling hime equity to boot, and you have the makings of a financial storm.

I disagree with Schiff that most Americans are charging to their cards with no intention of paying it back.  I think Americans are generally well intentioned, hard-working folk who just see no other options than to use cards presently in hopes things will get better.  I agree with you that those intentionally charging with plans to walk away are a miniscule minority.

Lastly, I don't believe that it is rational to be taking on debt at this stage to take advantage of investment opportunities.  As great as I perceive the opportunity to be in precious metals, for example, you won't see me touching a margin account with a 10-foot pole.  Economic crises like this one are deleveraging events, and you don't want to be leveraging into that type of a headwind.

My $0.02.  :)  Fool on!

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#4) On May 13, 2008 at 9:32 AM, XMFSinchiruna (27.46) wrote:

By ELLEN SIMON, AP Business Writer
Tue May 13, 12:06 AM ET



NEW YORK - The economic downturn is hitting roughly one in 10 middle-aged and older Americans especially hard, compelling them to borrow money for everyday living expenses and to seek help from family, friends or charities, according to a survey released Tuesday by the AARP.

In the telephone survey of 1,002 adults 45 and older, nearly four in 10 said they had helped a child pay bills or expenses. Among retirees, one-third said they'd helped their children pay bills. Eight percent said they'd helped a parent pay bills or expenses. The survey's margin of sampling error was plus or minus 3 percentage points.

One-third of survey participants said they stopped putting money into their 401(k) or retirement account and 14 percent said they had cut back on their medications.

"We have patients coming in fewer times," said registered nurse Tucky Franz of Salisbury, Md. "They'll cut back because of the copay."

The majority of baby boomers said they were finding it more difficult to pay for essentials and utilities, and six in 10 said they had cut back on eating out and entertainment.

James Dyas, 75, of Sherman, Conn., said he and his wife go to their favorite Mexican restaurant about half as frequently as they used to. "About all the money we have goes to buying gasoline," he said.

While the survey doesn't show large numbers of people making radical changes — taking second jobs or moving to a smaller home — it did find that more than one-quarter of those surveyed are having trouble paying their mortgage or rent.

Compared with older people, a greater percentage of younger baby boomers, those 45 to 54, said they were cutting back on medications, prematurely withdrawing retirement funds and postponing paying bills.

"For the younger boomers, it's been an especially rude wake-up call," said Jim Dau, a spokesman for the AARP, a nonprofit that advocates Americans 50 and older.

Debra Koziol, a 48-year-old hospital finance worker in Rhode Island, said she's started carpooling to work with her sister a few times a week and packing lunch every day.

"The food is better," she said. "Some of this is creating better habits, not so much waste."

http://news.yahoo.com/s/ap/20080513/...economy_survey

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#5) On May 13, 2008 at 11:06 AM, binv271828 (< 20) wrote:

Yeah, abitarecatania has a ton of good Peter Schiff links and videos. Here is a Bloomberg interview that I think is very good. He gets a chance to state his views fairly comprehensively. Of course, he does that in Crash Proof too :)

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#6) On May 13, 2008 at 3:33 PM, TMFDeej (99.41) wrote:

Good post, Sinchiruna.  I've actually read "Crash Proof: How to Profit from the Coming Economic Collapse." It's not bad.  Schiff makes sone very good points, but he's a little over the top in parts and more of a goldbug than I am.

Deej

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#7) On May 14, 2008 at 10:55 AM, XMFSinchiruna (27.46) wrote:

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