The Consumer's Credit Card Capacity Collapse; R.I.P. U.S. Middle Class Purchasing Power
Even as the government has taken on leadership roles in virtually every segment of the financial and corporate arena, and we see the impact of excess central bank liquidity every single day not in pass-thru lending by the major commercial banks, but in the price of Amazon stock which is now trading at Strong Conviction Lunatic Buy levels, there is yet one segment that the government is powerless to manipulate, no matter how hard CNBC tries (with its constantly declining audience each month the administration could have chosen a more popular medium to brainwash the masses). And, unfortunately for Obama, it is the one segment that is critical to this economy improving: the US consumer, which until recently accounted for 75% of America's GDP, and by implication, almost a third of world GDP.
The recurring problem: continued massive credit contraction - seen every month not only in the government's G.19 report, but direct from the horse's mouth: the big credit card companies. The most recent picture is indeed gloomy. After total unused credit card lines peaked at $4.7 trillion in Q2 2008, the number has plunged to $3.5 trillion: a $1.2 trillion evaporation of consumer purchasing power. The flipside- utilization rates continue to rise as the actual amount borrowed on credit cards is also declining, but a much slower pace. According to the FDIC's just released report, there was $784 billion borrowed between credit card loans and securitization receivables. The U.S. consumer is not only retrenching, but banks continue to limit credit card purchases, which further constrains spending, creating a vicious deleveraging, and thus deflationary, loop.
We present data by bank for the four main credit card institutions as well as for the entire credit card lending segment in its entirety.
Bank of America's most recent total credit card commitment stood at $572 billion, a stunning 37% drop in available credit card lines from the peak in Q2 2008 of $914 billion.
The same trend is visible at Citi, who total unused card capacity of $815 billion is a 28% decline from the top of $1.13 trillion...
...at JPM, a 26% decline from the peak of $785 billion to the current $584 billion...
...and at Discover, which had a mere $174 billion in commitments.
Combining the "Big 4" demonstrates just how badly the credit contraction has impacted the major banks, which are obviously in cash hording mode, and are making life for the average consumer that much more difficult as utilization rates are forced to increase (presumably at higher accompanying rates and fees) while overall unitilized capacity collapses.
Expanding this analysis to the entire credit card industry demonstrates a comparable trend: utilization rates have hit history highs at over 18% while the total CC commitments have dropped, as noted above, from $4.7 trillion to $3.5 trillion.
And this scenario of consumer leverage collapse is only just getting started. According to Meredith Whitney:
Considering that $1.2 trillion has been cut since 2Q08, we believe that by the end of 2010, $2.7 trillion of lines will be expunged from the system. We believe unused lines will be reduced by $2 trillion, to an estimated $2,700B by 4Q09, and nearly $2.7 trillion to an estimated $2,011B by 4Q10. Concurrently, we believe the utilization rate will increase from 17% at 4Q08 to 23% by 4Q09 and 30% by 4Q10.
These are some seriously deflationary observations. Here is how they look graphically.
What Meredith is saying, and what many, including Obama, are starting to grasp, is that the middle class as a driver of the US economy, is now a relic of the pre-Lehman days. Kiss goodbye to that traditional, resilient 75% component of GDP. In its place, assume the US government will do all it can to make up for the shortfall. Alas, that is a recipe for certain disaster. The only thing that Obama can and will do, is focus on the upper class to spearhead tax revenue generation, whether it is from capital gains tax (think forced stock market appreciation) or from federal, state and income tax (recall, the upper 5% of US society accounts for possibly 50% if not more of all Federal tax revenues). Which is why the liberal party has now been forced to become "republicans in democrat clothing," pandering not to the lower and middle classes, but exclusively to the top percentile of American society. Zero Hedge wonders how long it takes before US voters finally have the epiphany that in Larry Summers, and his economic pawn "superior," they have accomplished the one most historic achievement of electing a fully 180-degree converted chameleon.