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Credit Debt Has Dug a Two-Decade Hole


The era of overindulgence is coming to a halting end.


Editor's Note: This article was written by James Quinn, a senior director of strategic planning for a major university. James has held high-level financial positions with a retailer, home builder and a university in his 22-year career.

For the last three decades, you didn't really need anything in your pocket. You could just whip out one of your 10 credit cards and act like a hotshot. Cash was for suckers.

Credit cards are so easy to use. You just pull it out, buy whatever you desire, and make a minimum payment every month until infinity. We've become a minimum-payment nation; if you can handle the minimum payment, it's yours.

In 2006, the Census Bureau determined that there were nearly 1.5 billion credit cards in use in the US. A stack of those credit cards would reach more than 70 miles into space, and be almost as tall as 13 Mount Everests.

Consumer credit debt has risen to $2.5 trillion from $400 billion in 1980. Consumers have an average of 5.4 credit cards with $973 billion outstanding.

At the end of 2008, households that used a credit card had an average outstanding debt of $10,679. Excluding mortgages, the average American with a credit file is responsible for $16,635 in debt, according to Experian.

The most fascinating fact is that the top 10 US credit card issuers held an 87.55% market share of the outstanding $973 billion linked to general-purpose cards in 2008. A number of these are coincidentally the same ones that brought down the financial system -- Bank of America (BAC), Citigroup (C), JP Morgan Chase (JPM), Wells Fargo (WFC), Capital One (COF), HSBC (HBC), American Express (AXP), Discover (DFS), US Bank (USB).

Consumer Credit Debt

Source: Federal Reserve
Click to enlarge

It's taken Americans three decades of overspending and under-saving to get into this pickle. As you may notice, consumer credit debt is $2.5 trillion and has barely budged downward.

The pundits and economists predicting a strong economic recovery are blind to the truths of consumer debt. With actual unemployment exceeding 16.8%, 9 million people forced to work part-time, the work week at all-time lows, and banks shutting down credit lines, consumers will be reducing or defaulting on their debt for years.

Also important to note is that 70% of the economy is dependent on consumer spending, which means there's absolutely no chance of a strong recovery.

As a percentage of disposable income, household debt-service payments reached a peak of 14.2% in 2007 and have plunged all the way to 13.5% -- disposable income is plummeting as people without jobs don't have anything to dispose of.

A paradigm shift is occurring, but the mainstream media, mainstream economists, and politicians running this country don't seem to understand the implications.

Three decades of debt accumulation is not resolved in two years. It'll take decades of reduced spending, paying down debt, and writing off debt.

The Federal Reserve, banks, and politicians are frantically attempting to make consumers borrow and spend with the Troubled Asset Relief Program (TARP), Term Asset-Backed Securities Loan Facility (TALF), Cash for Clunkers, and numerous other debt-increasing gimmicks. The consumer is tapped out.

No positions in stocks mentioned.

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