Photo: Mindaugas Danys via Flickr
America’s love of credit cards has returned, with consumers adding $6.1 billion in new credit in December according to the latest data from the Federal Reserve.Yes, in the medium term, it does signal that U.S. citizens have fallen back in love with their credit cards. That’s partly the result of an improving economy. The other part is extremely easy Fed policy encouraging banks to lend and consumers to take on new debt.
But does this mean the deleveraging is over? Or that the “balance sheet recession” has come to an end?
At the current trajectory it’s not unreasonable to assume that the balance sheet recession will last well into 2012 and potentially longer. While a 1:1 ratio is “sustainable” by my estimates, it would be comforting to see levels closer to the historical levels in the 80% range. If that is the case we could see the impact of the balance sheet recession persist far longer than anyone believes. The obvious upside risk is a dramatic improvement in the labour market. On the other hand, our government is now explicitly encouraging fiscal imprudence in an attempt to “keep asset prices higher than they otherwise would be”. This sort of policy has the very real potential to increase instability and turn recovery into bubble.
Right now rates are low because Fed policy is easy. But what if inflation continues to rise in the U.S.? The Fed could be forced to raise rates, which could be passed on to consumers and create a whole new series of defaults.
There’s no reason to think the U.S. has an inflation problem it could treat by raising rates. There may be food inflation or fuel inflation, but core is still weak and looks like it will be for sometime. But if the public starts to clamor for a rate hike, like it is in Britain, due to rising food and fuel costs, credit card holders with variable rates could be in trouble.
Credit card companies are already raising rates because of regulation. Any Fed move on rates could make their lives more difficult.
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