Emptied Accounts and Maxed Out Credit Cards

The American Consumers Lives and Breathes Debt

I’m sure that somewhere in your past, you’ve heard the snarky comment about “Rearranging deck chairs on the Titanic”—a snide little assertion about the futility of some moment.

Well, I’d like to introduce you to the American economy, circa third quarter 2023.

Maybe you saw the news last week about how Uncle Sam’s economic might posted a robust 4.9% annual growth rate. As the English-language version of Parisian newspaper giant Le Monde headlined it: “Behind the US’s surprisingly strong third-quarter growth.”

In fact, the first three words to the Frenchies’ story were, “Unexpected, remarkable, phenomenal…”

President Joe Biden called the results “a testament to the resilience of American consumers and American workers, supported by Bidenomics.”

Well, that’s certainly one sentence one might use.

Another sentence might be, “Um, dear, can you look under the hood? There’s a weird noise coming from the resilient consumer.”

See, the funny thing about the American consumer driving the U.S. economy in Q3 is that said consumer is a lot like a traveler lost in the desert with a single canteen of agua. The world is watching him on a reality show, and just amazed the canteen has lasted this long.

Of course, what viewers don’t know is that the canteen is empty, and Mr. Consumer is just living as long as he can on the spit in his mouth before even that dries up.

Perhaps I’ll just quote a headline from Fortune magazine that ran a day after the unexpected, remarkable, and phenomenal GDP report…

“Americans are sinking in debt as household expenses grow faster than income, new poll says. ‘The economy is good on paper, but I’m not doing great“

As I’ve been writing for a while now, the American consumer is not so much resilient as he is good at applying for new credit cards. And the credit card industry is clearly populated by credit-card approval algorithms that place a high emphasis on desperation.

U.S. credit card debt has cumulatively topped $1 trillion. That’s a record, though I’d argue a bit of a nasty one.

Credit-card delinquency rates are now at 7.2%… above pandemic highs, and above the rate seen in 2009 at the height of the Great Recession.

Auto-loan delinquencies, now at 7.3%, are higher than any time since 1994.

Oh, and the Federal Reserve estimates that, based on its research, the horde of cash the American consumer sat upon just after the pandemic is now gone. At most, “the consumer” writ large has a couple more months of savings to waste, and then the trough is empty.

No need to call on your high school classes in differential calculus to know that this much debt, not enough savings, and this much consumer desperation can only end badly.

There is no second option.

I mean, American families could adopt a Bonnie & Clyde persona and start knocking off banks on a daily basis to gather up the cash they need to make good on all the credit they’ve been provided by American Express and Mastercard.

Credit card companies have kept the U.S. consumer on life-support, despite consumers’ demonstrated inability to pay. (I say “inability” because credit-card balances growing past $1 trillion is de facto proof that consumers are spending money they don’t have and allowing those expenses to collect as “Balance Due” rather than paying them off.)

More likely… Biden’s victory lap will prove so hollow that it echoes.

Consumers reached the end of their rope long ago, and they’ve simply been unwinding individual strands of hemp to hang on for as long as they can.

Alas, the end really is nigh.

Uncle Sam can rack up debt and never think about it (that’s its own disaster waiting to happen), but consumers cannot.

Credit card companies will come a’calling.

Funny thing about debt is that it woos you at the beginning of the relationship… and then rips your heart out at the end.

Lots of broken hearts are pending.

Lots of pain on the horizon for consumers. And for banks that overextended credit to consumers.

Which means lots of pain ahead for the American economy.

Yes, the U.S. has so far staved off the supposed recession that has not yet made its appearance.

But like I said, consumers cannot live on debt forever.

At some point it all goes pear-shaped. There’s no other way out of this.

To me, this moment smells a lot like the months before the housing collapse of 2007.

If you saw the movie The Big Short, you might remember that the crash happened because Wall Street was repackaging crappy sub-prime mortgages into large bundles of loans and selling that bundled as a security. The Street’s boneheaded idea was that by sticking all this junk into a big bundle, that junk was magically transformed into A+ quality debt.

It was like taking a rusted-out car, repainting it, and selling it as brand new.

When the junk inside the bundles began to fail—when over-extended homeowners began defaulting en masse—the Jenga Tower of crappy, packaged loans collapsed in a junky, decidedly non-A-grade pile of uselessness.

That’s the perfect analogy for the U.S. economy.

It’s built on a consumer whose balance sheet is, well, crappy. It’s entirely larded with debt.

The minute the consumer can no longer afford to carry all that debt, credit card companies are going to see defaults soar (and their stock prices sink). Consumer spending is going to collapse. And the economy is going to retract mightily.

I just wonder if Le Monde will call the coming crisis, “unexpected, remarkable, phenomenal…”