The Inexplicable American Consumer Hits A Wall

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The strongest and toughest creature out there, and maybe the smartest one, that no one has been able to subdue yet, the inexplicable American consumer has hit a wall. And it showed up in a prosaic but ugly 8-K filing by Visa.

Credit cards are a true anomaly in these crazy times of ours. The yield on 10-year treasury notes swooned to a new record low of 1.61%. Interest rates on savings accounts and most CDs are so close to zero that you can’t see the difference on your statements once you round to the nearest dollar. 30-year mortgages come with rates of under 4%. And yet, credit card interest rates are where they’ve always been: high. In many cases well into the double digits.

Consumers have struggled with them. Before the Great Recession, when credit was unlimited and easy, consumers charged the cost of improving their lifestyle to the future to make up for the long decline in real wages—that haven’t kept up with inflation since the wage peak of 2000.

Then it all ended. Consumers defaulted on their credit cards or paid them down or off and cut them up, and the smart ones were able to roll their balances into a home-equity line of credit and then let it go into foreclosure, thus getting rid of debt in the Goldman Sachs kind of way, and overall credit card balances dropped. Transactions shifted to debit cards, which appeared to be the more prudent way, and banks pushed them because they could squeeze higher fees out of merchants. But declining credit card debt drove the Fed ragged; the last thing it wanted was for consumers to get out of debt. So it must note Visa’s 8-K with relief; consumers appear to be back on track to becoming life-long debt slaves whacked on a monthly basis by high-interest credit-card debt.

Visa’s aggregate payment volume was down 3% in the US for April and stagnated through May 28, compared to the same periods last year. Behind the aggregate, bad as it was, hid an astounding shift: credit card purchases actually jumped 8% in April and 10% through May 28; but debit card purchases dropped 12% in April and 8% in May.

Media pundits, in trying to explain away the shift, fingered new regulations—the infamous Durbin amendment—that decimated the debit-card fees Wells Fargo, Bank of America, JPMorgan Chase, Citi, and hundreds of other banks charged merchants. And so, the pundits explained, the industry responded to the loss of revenues with new pricing plans (Visa’s plan is currently causing some rumpled eyebrows at the Department of Justice), and consumers responded to these new pricing plans by plowing back into high-interest credit card debt. Here is one that made the rounds (American Banker):

The sluggish performance was driven by declines in debit-card purchases, which have taken a hit in recent months from new regulations governing how card networks such as Visa and MasterCard handle debit transactions.

A mind-boggling non sequitur. Even the inexplicable American consumer can’t see the fees merchants are charged for credit and debit card transactions. When consumers whip out a card, they choose between borrowing at high interest rates (avoidable only by always paying off the entire statement balance) and having the amount taken out of a checking account in real time. But the fees that the merchant pays don’t show up in this decision process as they’re unknown to consumers and don’t impact them directly.

To account for such a drastic shift, a deeper, gloomier pattern emerges. The inexplicable American consumer, pushed to the max, with checking accounts dry and debit cards useless, is trying to hang on by the fingernails to a lifestyle that is edging out of reach. In grasping for it, they’re using every means they can, even high-interest credit-card debt which will haunt them for years to come. A return to this scheme is not exactly a bullish sign for the economy, though it’s good for the banks (until the inevitable write-offs start wreaking their havoc).

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  7 comments for “The Inexplicable American Consumer Hits A Wall

  1. Vladimir Vladimirovich
    May 31, 2012 at 9:55 pm

    Let me try to explain to you that buying dehydrated food packs, portable shelters, medicines, arms and ammo and various survival items underlies the strong credit card spending. Those purchase are made with the understanding that debts, or dollar denomination of those debts will be very different concepts in the near future. I will concede to Professa Benake his success in forcing Amerisumers to buy new compact cars, since the monthly gas saving cancel out the finance and tax charges. Once fuel costs go down, that strong leg of the economy goes as well.

  2. lucas
    Jun 1, 2012 at 1:42 am

    while living in the usa for 22 years , i have been wondering if americans run out of money before running out of space to store the goods they buy., i now know its money.
    now living in China and knowing consumer spending does not keep up with GDP, i am more leaning to space.
    with most people living in appartments , no attic no garage no garden or garden shed and no extra rooms to fill , space would be china's final frontier.
    goodluck to those corporations that think sales will be the same per capita in china as it is in the usa.
    and for car company's even more luck, until they solve the parking and road space problem or are able to add 10 virtual dimensions, their best future would be in a "scotty beam me up"system .

  3. Wolf Richter
    Jun 1, 2012 at 3:35 am

    Lucas – the idea of consumerism is that all this stuff forces you to get a bigger house or apartment.

  4. lucas
    Jun 1, 2012 at 9:33 am

    Wolf, it is that large game that keeps the world employed and also will be its downfall. until our (smart) governments and banksters invest in some true space exploration and find other fools (aliens) to buy our crap and somehow create a financial surplus,, but until then we set our own traps.

    p.s i enjoy reading your through your website from time to time

    lucas

  5. Wolf Richter
    Jun 2, 2012 at 3:09 am

    Lucas – Thanks. And I agree, we do set our own traps. Time after time. It's human nature, I think.

  6. Anonymous
    Jun 5, 2012 at 4:32 pm

    Reaganomics: Reality strike back.

    This "lifestyle" turned the land of the free and the braves to the molested and the cowards, good thing it is coming to an end.

    Don´t whinne, you had decades to prevent this from happening but basketball and MTV was so much more important than politics, wasn´t it?

  7. Sharon
    Jun 17, 2012 at 5:51 pm

    Most of the major CC companies have juicy contracts to administer food stamps. If VISA is among those companies, they've been raking in more bucks for food stamp admin as the numbers of people on that 'benefit' have skyrocketed. Back those numbers out- whatever they may be- and the 'real' decline is even worse.

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