Inflation, recession and living on “borrowed money” as credit soars

Inflation, recession and living on “borrowed money” as credit soars

Fear of recession and price pressures have not tamed Americans’ urge to go out.

Driving the news: Credit card balances defy the gravity of stubborn inflation and slower growth. They account for about $890 billion of Americans’ staggering $16 trillion in household debt.

What’s up: Expenditure on experiences, such as travel and entertainment, has replaced physical goods such as clothing and home goods as the choice of consumers.

“If your costs begin to exceed your income. What are you doing? You’re looking for a relief valve through borrowed money,” investor Peter Tarr said in a Twitter thread this week.

  • Credit is “a smaller option for liquidity, that ‘just in case’ or to ease some costs. Then its loans / refinancing. Home sales, etc.,” noted Tarr.

Zoom out: For thrifty consumers, one saving grace has been rising wages which, while failing to keep pace with rising inflation, are still rising at the fastest pace in decades.

  • They are also bolstered by an unusually strong labor market that has kept the unemployment rate below 4%, giving job seekers a lot of leverage.

What we’re looking at: Credit card issuers are tapping into Americans’ hunger for debt, primarily by offering travel-related bonuses and cash back on purchases, according to data from Wells Fargo.

  • The survey found that 45% of Americans with rewards credit cards “rely on their credit card rewards to help offset some of the costs of everyday purchases.”
  • Mastercard and Visa both reported booming revenues, even as retailers such as Walmart, Target and Best Buy warned that high costs were leading to tons of excess merchandise.

What they say: “No one can live on borrowed money forever,” Ron Hetrick, senior economist at Lightcast, said this week, linking the job shortage to rising credit debt.

  • “There are 22 million people in the workforce who use credit cards to pay for their expenses. In a job market with 10.7 million job openings, those potential workers can go a long way to address the talent shortage we’re seeing across the board,” he added.

Our thought bubble: If the job market remains relatively buoyant (July’s blockbuster report suggests it will) and wages continue to rise (as well), most consumers will likely find a way to keep the bills paid.

  • Still, with weak US data fueling recession talk, none of the above is a given. And anyway, it’s simply not sustainable to carry billions of dollars of revolving debt when growth is falling and inflation is rising.

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