We all know that over the last forty years there has been a significant expansion of consumer credit products available to Americans but what might not be so obvious is how well the typical American consumer segregates their available credit from their actual current wealth.
Be it home loans, auto loans, student loans, credit cards, professional cards, bank cards, overdraft protection or home equity lines of credit (HELOCs), when you consider the extent of credit available for financing everything from small discretionary purchases to major once-in-a-lifetime expenses, it should come as no surprise that Americans have lost their ability to distinguish current wealth from the future wealth that they appear to so effortlessly promise away with interest.
With incomes generally flat to declining (in real terms) and interest rates at or below historic norms for better than a decade, it’s no wonder that Americans have become more reliant on credit to both smooth out the monthly cash burn as well as provide the extra funding for trips, home repairs, education, small discretionary purchases (cell phones and other personal technology) and other expenses that would have traditionally been drawn from income growth in decades past.
Many of these typical costs and expenses are the basis for driving our now largely service-based economy so in a sense, our overall economic growth has come partly as a result of our “access to” and “willingness to employ” credit.
Given the events of the last few years related to toxic mortgage products and epic home equity extraction, it’s safe to say that “willingness to employ” is a bit of a no-brainer… give Americans access to credit and they will use it no matter the terms, no matter how financially unsound.
The key now for the prospects of our near-term future economic growth is “access to” credit.
Without increasing access to credit (and assuming near nil real income growth), Americans will feel as though their wealth is in decline.
While this could be a good thing long term as Americans re-learn thrift and are forced to break their reliance on debt, in the near term, less access to credit would likely equate to more deflationary macro-trends.
Even with the immense government support of the mortgage market, the latest read of non-revolving credit outstanding shows continued tepid contraction at $1.592 trillion, a level more or less unchanged for about two years.
Revolving credit, on the other hand, is undergoing a massive shift.
Looking at the following chart although one could conclude that Americans are becoming more aware of the burdens of debt, cutting back to the tune of 9.43% on a year-over-year basis (nearly the most significant annual rate of decline on record), it’s more than likely the case that this contraction is occurring as a result of lenders simply continuing to pull back, limiting access to credit.
Reduced personal debt lines and canceled home equity lines of credit as well as a general tightening of credit standards are likely working to reduce Americans sense of personal wealth and in turn resulting in further consumer retrenchment and an exacerbation the economic decline.
Just as increasing access to credit worked to fuel decades of economic expansion, collapsing access will provide serious headwinds to any durable recovery.