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Wednesday, May 27, 2009

Why we might be in a "depression"

A Depression has multiple definitions, unfortunately. However, one way to think of a depression is a protracted retraction in GDP. The Keynesian approach is to assume that GDP is a sum of (at least) four components: consumer spending (by private households), government spending (by governments), investment (by private firms), and net exports (imports-exports).

The national income identity is therefore GDP = C + G + I + (X-M). The current (and previous) administration view the situation as being the following. If C drops then GDP will fall. To offset the decline, G can increase and all is hunky-dory. However, one problem with the Keynesian model is that the equation as it is written is static wherein the formulation of GDP is inherently dynamic. For example, G doesn't just pop out of thin air, no matter how the politicians act as if it can by simply passing spending measures. G must be appropriated from the private sector either through taxation or inflation. Unfortunately, tax revenues (and inflation) happen over time not in a single instance (as we see in this story where tax revenues are ostensibly down 34% at the IRS - didn't hear anyone talking about that earlier this year did you?).

Ultimately G must be financed by taxation or inflation. Inflation is the more insidious tax, in my opinion, because it is hidden and it is involuntary and, contrary to progressive philosophy is extremely regressive.

Inflation might be a problem in the future, that remains to be seen. However, the recent changes to the consumer credit market is likely to move a lot more people toward using debit cards, lay-away, or "saving" money for big-ticket items (which might not be purchased if something happens between Time 1 and Time 2). The credit-card companies are already reducing credit limits, have now been told that they are persecuting their customers and therefore are evil and must reform.

Here is a graph of outstanding consumer credit card debt:



What is the one reform that was not enumerated in the CCARD legislation? Not offering as many credit cards.

What's the upshot of that? If people move away from buying on credit (which I did just recently for a $1400 package of three appliances) to paying cash, there will be that many fewer appliances sold in a given year/quarter. As the consumer credit card debt falls, this reduction will manifest as a reduction in GDP, and as debt is retired but taxation increases C and perhaps I will fall. The question is whether net exports and G will increase enough to offset the difference. In the medium to long run it cannot simply because the government cannot continue to float 1-2 trillion in debt every year - it can't, period.

I say that, but it is possible that in the medium run it is possible to replace our credit card spending, and as a byproduct the enjoyment that we receive from consuming the goods we purchase with our credit cards, with taxation. That is, in the medium run it is possible for individual disposable income to stay the same or fall just a bit, we send more to the government and less to Visa and people generally spend less and perhaps enjoy a lower standard of living.

Is it likely that there are a lot of people who are in credit card debt that is unmanageable? Absolutely. I know that because if the average household credit card debt is $8500 and I have no rolling balance on my credit cards, there is at least one household with $17,000 in credit card debt. However, the attacks on the credit card companies seem a bit unwarranted given the incredibly competitive market for credit that has evolved over the past twenty years.

The upshot of constraining the ability for individuals to purchase on credit is that consumer spending will fall over time, it has no choice. This, in turn, might actually drive us into a depression.

Unintended consequences? I don't think so.

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Comments:
The NBC pundits (Chatzky and Wong) are bound and determined (paid) to plug their coorporate sponsors and perpetuate the 'multiple credit card' lifestyle. Their claim is that you need more than one to build reasonable credit, finance a home, and be relatively secure financially. THAT IS ANOTHER FLAT-OUT LIE. The industry is simply too corrupt and predatory to deal with. It has been for at least 20 years. The use of 'multiple credit cards' is simply too risky, addictive, complicated (check that fine print), and ultimately expensive. In the vast, overwhelming majority of cases, the 'multiple credit card' user has ended up further in debt year after year after year. Their credit was built to some extent on a temporary basis and their ability to repay loans was diminished gradually right along with their bottom line. They ended up paying as much or more in finance charges as they did on principal. That is OBSCENE. Now, their net worth is way down. Their ability to get out of debt f#$&@#. That 'credit' didn't get them anything but F#$#@#. Still, those NBC pundits (liars) have the nerve to perpetuate that 'multiple credit card' lifestyle as if it were ever legit or necessary to begin with. It wasn't. Until two years ago, one could have built reasonable credit with a stable income, a checking account, a savings account, one secured credit card, one loan for a used car, one loan for a new car, and a reasonable downpayment. Until recently, that was enough credit to get a first home loan. Now, the economic boom is OVER. The majority are F#$&@#. Its only going to get worse. A LOT WORSE. The window for ordinary (decent) people to stake their rightful claim is closing fast. They better get out of debt soon and well prepared for the comming US/global depression. It will be catastrophic. Under these circumstances, it is downright reckless and irresponsible to promote more use of credit cards. Only a calculated PIG with an ulterior motive would have the nerve. The 'multiple credit card' lifestyle wasn't the only cause of this economic crisis but it was a contributing factor. Another vehicle amoung many to transfer wealth from poor to rich. Which again, is the single greatest underlying cause. IT WILL BE OUR DOWNFALL.
 
This post is not to refute the angry person above me.

I have multiple credit cards that offer me an incredible amount of available credit. However, all of these cards have a zero balance. In fact, I have no debt to my name. I use the cards in order to maintain a perfect credit score, which has a value of its own. I don't come from a rich family and I've never had an above average income.

I'm only one data point, but I don't really understand why so many people find it so difficult to manage credit card debt. A credit card is a quick convenient source for loans. If someone wants to avoid paying interest, she can either not use a credit card or pay the card off before the end of the month.

I just can't find sympathy for those who take out loans without the ability to repay according to the terms agreed upon.
 
Even when those terms agreed upon are burried in a dozen pages of fine print filled with legal terminology that most people can't understand?

Even when payments recieved on Friday aren't processed until Monday with late charges?

Did you know that every major industry now employs people trained in both marketing and psychology? Why do you suppose that is?

Did you hear about the judgement against Discover a couple years ago. The credit card provider was found to be corrupt and oppressive in a court of law. They were found to mislead the account holder and extract MUCH more in finance charges than in principal. The account holder was relieved of any obligation to pay the remaining balance.

People are stupid but the industry is corrupt. I scold the moron who fell into the trap but ultimately I blame the pig who set it.

Chatzy and Wong are both pigs.
 
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