Tuesday, March 27, 2007

The Credit Card Bubble

Let’s put ourselves in the banker’s chair. Suppose the credit situation is getting more strung out. People are not paying on time and charging more on their cards. How could you hide it? Ans. by issuing more cards. This would make the debt per person seem reasonable and at the same time your creditors would loan you more to do the same thing, give people free money to buy more stuff.

What we have is a balloon that is inflating ever more rapidly. The reason it’s inflating more rapidly, is that it’s a real Ponzi scheme. As long as the credit card companies can pay the interest and the defaults haven’t killed them, they are still in business. More “new” customers keep the game going (how many cards do you have?).

The credit card companies shouldn’t have much of a problem paying the maintenance fees, to service the debt. They are charging 18% interest to the credit card borrowers. So they need to give their lenders of good faith 7% off of the top. That leaves them a net of 11% return during good times. So as long as times are good, the lenders to the credit card companies are getting a 7% return and the Credit card companies are getting 11% for managing unsecured debt.

Notice as with a Ponzi scheme, it’s the float that keeps the thing going. As long as there are more investors putting money in, there isn’t much worry. It’s when loan renewals stop exceeding cash demands that a problem arises.

What happens when big money decides not to renew their loans to the credit card companies? It could be considered a contraction of the money supply. That 11% float would be used to pay off any called loans. Its when you realize that the 11% in good times might only be about 3% in bad times with credit card write offs.

So let’s see, 2 trillion of unsecured credit card debt. Now, if you are a retirement fund manager and decide the risk is too great, and decide to not renew your note with a credit card bank, what happens next? Remember, how the sub prime and alt-A 100% loans disappeared? Hmmmmm!!!!

It was the banks in 1929 that bit the dust, this time “it’s different,” it could just be the credit card companies. The government is not going to bail them out. That amounts to paying off Joe Six-pack’s wide screen Plasma TV and the sex change operation.

The real problem at this point, is the problem created by giving everybody a credit card. The amount owed on a lot of the issued cards will probably not be paid. The interest on the debt was the only concern of the consumer. When payment is called for, it’s just not there. There is cash to pay the interest, but nothing to pay the principle. The people who loaned to the credit card companies have secured debt. Secured by 'what' is kind of a joke. It’s kind of like a rock, paper, scissors game, only this time its rock, paper, scissors, and caca.

Nah, it’s probably just my imagination running wild again. . . . … . .

6 comments:

CMW said...

Great writing Jim - funny one liners. You have a gift, keep it up. Any hack can compile the numbers, but few can give it to you, make you laugh, and lend you a line to remember it by.

majid said...
This comment has been removed by a blog administrator.
Numpty McHoon said...

Jim, have you heard about this documentary: In Debt We Trust?

Makes some great points, and while it doesn't touch on the RE Credit bubble, you can see the parallels very clearly for yourself.

"Then the credit cards discovered that unlike the wealthy, poor people pay their bills."

"A person might have a c.c. balance of half to almost their entire annual income, but they'll always at least make that minimum payment."

"They'll make the minimum payment, until the day they die."

"The credit card issuers aren't as concerned about the account balance as they are about getting that monthly minimum payment. The fees are pure profit. They don't care if the debt is never paid off."

"After they got the bankruptcy 'reform' law enacted their customer cannot declare BK and disharge their debt."

"Remember that old song I Owe My Soul to the Company Store? Well, we're back to those days again for anyone over-extended on a credit card."

Sheesh. I'm glad I listened to that guy that told me in my younger days "credit is a great thing to have, just never use it."

CreditPir said...

Credit cards can act like magic wands in case of debt or any financial problems. Some people use credit cards because of convenience to pay, opportunity to get rebates and rewards,etc, others get them because of necessity. In both ways, holder should use credit card wisely trying not to overspend and paying on time.

Opra said...

Nowadays credit card industry develops rapidly and almost everyone has a credit card. But people forget that credit cards can be both profitable financial tools and reasons for many problems.

Danny said...

Hey Jim -- Many Americans (although most are still being spoon-fed stories) realize that the bailouts of corporations or foreclosures are excuses to print more money. The goal of printing more money to keep the economy afloat is understood, but I believe that keeping the economy afloat is a motive of its own. The Middle Class is obviously not any of their concerns, otherwise maldistribution of income would not be so apparent.

It is disturbing to believe that printing more money worsens the current situation since the poorer the country is the cheaper it is for the richer to consolidate their wealth and power. I'll repeat that, the poorer a nation is (regardless of how many people are dying and suffering) the easier it is for the Power at be to get everything for cheap and minimal effort.

Also, anticipate that the Ameros will be the next option on the table to bail out the US economy if not the world. We will be left with no options besides AMEROS.