De-leveraging sucks...credit cards are next

An interesting article here. The running theme seems to be that America's lifestyle is nothing more than an illusion feuled on massive mountains of debt (shocking right). Whether this illusion is perpetuated by stocks, houses or credit cards, the point is that we always fall from our respective highs and when we do it's not pretty.

Synopsis:

Real Wages (inflation adjusted wages) haven't grown, so Americans have been using debt (ie negative savings rate) to fuel their ever growing consumption habits.

Since the market sucks, and housing has tanked (meaning no more HELOCs) Americans have turned to the last (most expensive) cash machine left: credit cards.

Credit card debt has been growing much faster than the economy - more than 8% in last year's third and fourth quarters and over 7% in May (the most recent month reported)- people are apparently using it as a substitute for income. Thus, for the past year or so we have still maintained the standard-of-living illusion.

But now even that cash machine looks like it's about to break down as the appetite for securitized credit card debt has been cut in half in the last 5 months.

But a big crunch is coming - and here's why. Credit card debt, like mortgage debt, gets bundled, securitized, and sold off by banks. Citigroup (C, Fortune 500), one of America's largest credit card lenders, just reported that it lost $176 million in the second quarter through securitizing such debt. That happens when the buyers of those securities observe rising delinquency rates and rising interest rates, and decide the debt is worth less than Citi thought. More generally, the amount of credit card debt that is securitized nationwide has plunged by more than half in the past five months because it's getting riskier. That means credit card issuers will be charging customers higher interest rates, and since the banks can't offload as much of the debt as before, they'll have less money to lend to cardholders.

However, Congress isn't going to let credit card companies just hike up interest rates on cards, nevertheless, the end result of this legislation is that it will tighten lending/underwriting standards even more (this is actually good for the long run but VERY PAINFUL in the short run). Interestingly, Meredith Whitney spoke about this legislation a few months back - credit cards come up around at the 2 minute mark):



So what does all this mean? We are going to have to consume less and recognize.