Talking heads and media pundits are all talking about how we are nearing a bottom or “leveling off” of the current recession. Personally, I don’t think we’ve found the bottom yet. I think once we find the bottom, the world is going to stay there for a long time. The “turn around” everyone talks about will simply get us back to the condition we were in several weeks prior to the bottom, then we will stay there a long time.
I’m not basing this line of thought on doctored up accounting data or other reports seer sizzled up by the same accounting firms who participated in the stock market and mortgage fraud cases we’ve been hearing about. I’m basing this on current trends and human nature. I think it will be at least a 30% contraction and it will last for 3-8 years.
Prior to our finding out just how void of ethics the mortgage/housing industry was (we always knew about the Realtors), the credit card companies were held out as the bowels of the Antichrist. They would issue credit cards to people’s dogs if an application had been filled out. (That’s not an exaggeration, I know someone that actually got a credit card for their dog.) Credit card companies had a seemingly endless list of tricks to jack up interest rates or charge excessive fees. Consumers got used to being rectally violated by these practices and started playing the “ 0% Interest Balance Transfer” game as a way of getting even. Of course, that game would only yield victory to those who stopped using their credit card for anything until the entire balance was paid off. You see, you had to pay the 0% balance off before any payments were applied to your new charges.
Eight years ago, it was nothing to run into someone with five credit cards in their wallet. Nearly everyone of these cards would have some kind of balance that was older than one month. There was a large group of people who thought it was OK to buy $140 pair of sun glasses, then make minimum monthly payments to their credit cards. Of course, the credit card companies encouraged this behavior. They even paid Congress to change the bankruptcy laws without lowering the maximum allowable interest rate. Retailers flocked to accept credit cards and also encouraged consumers to pay it off over time. If it wasn’t for consumers living well beyond their means, CEOs couldn’t possibly get those multi-million dollar bonuses.
Today, we see that the White House is about to spank the major credit card companies like they’ve never been spanked before. When they left the meeting in Washington almost none stopped to talk with reporters. They knew it was coming. There has been a mad rush to jack up interest rates on every card out there. Granted, a lot of that money grubbing is because the credit card issuers had a lot of exposure to the mortgage crisis. They think if they squeeze unemployed people who are behind on their mortgages harder from the credit card side, those people will suddenly pay things off. Make no mistake, it is usually “mortgages” for these people. They bought a house, went hog wild with the Martha Stewart decorating thing, ended up with massive balances on their credit cards, took out a home equity loan to pay off the credit cards, then ran balances up again. Now they are upside down on a mortgage and have just had their credit card limit slashed below their outstanding balance to generate more fees for the issuer.
Being a consultant, I try to never carry balances on my cards. I also try to never finance a car. I’ve seen too many consultants rack up large debt while on a long term contract only to have that contract suddenly end due to some funding/policy issue at the client site. Those are the consultants you find slithering into those absolute shit contracts offered up by EDS or the worse ones offered up by Verizon through the illegal alien vendor management system. The billing rate doesn’t even begin to touch a living wage, but it generates cash flow to keep gas in the tank and food on the table. It won’t begin to pay off a single debt. Those consultants will spend each day on the phone continuing to look for a new contract which actually pays a living wage. It doesn’t take long before they are fired, not because they couldn’t do the work, but because they put forth the level of effort such a wage deserved.
Enough consumers have either now been thrust into this undesirable situation or know people in such a situation, that credit card practices are going to change. The credit card companies have already started one massive push to bleed people while they can. I just got rid of my Bank of America card because they sent a letter stating the new interest rate minimum would be 8.65%+ the highest prime rate published in the Wall Street Journal for the prior two weeks. Talk about assholes! Since I don’t carry a balance, I called to cancel the card. My final bill arrived today. I also ordered them to remove me from their contact list. Most people forget that step. They have to actually remove you if you request it at the time of card cancellation. This stops all of those annoying “We Want You Back” letters.
I don’t think I’m alone in my actions. While I don’t consider myself the cream of the crop for credit card companies, (and since I locked down all of my credit to avoid identity theft, they can’t tell what I am), I can’t imagine people who don’t have a balance on a card getting a letter like the one I received and not cancelling the card. There was a time I was one of those people with five credit cards in my wallet (though I usually didn’t carry a balance on any), now I’m a person with exactly one credit card. From what I hear a lot of people are getting down to one or fewer credit cards. Now that most banks pass out debit cards for free and you can even use them to buy on-line through any vendor that accepts the credit cards of the same label, I don’t see a lot of overspending happening in the future.
How does this equate to a 30% or better global economy reduction? Many economies relied on Americans living well beyond their means. Some countries had even banked their entire economic and infrastructure growth on being able to sell as much as they wanted to American consumers. China is feeling our downturn even more than we are feeling it. The world economy isn’t ready to face American consumers having fewer than two credit cards in their wallet and never carrying a balance, but that day is quickly approaching. Once we hit bottom, that’s as high as we are going for a long time. It took over 50 years after the Great Depression hit before Americans started to live beyond their means in any serious way. It’ll take twice that long now. This time we don’t have to carry cash and checks.