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There was this article in CNNMoney, Consumer credit: Surprise $1.8 billion jump, that suggested that consumer’s credit card borrowings increased by an annualized rate of 1.2% or $1.8 billion, however, economist were expecting a fall of $5 billion, signaling that households may have started to loosen their purse strings.

Yes, this would be the correct intrepretation in a normal healthy economy, but our economy is shrinking and has been throwing off 100,000s of jobs every month for more than a year. Current unemployment now stands at 8.1% or about 11 million.

The correct intrepretation is that consumers are hoarding cash and switching to credit cards to make their payments. Why? Because of the zero income survival strategy.

First, at the household level, in a zero income household, the survival strategy is you use your cash to make your mortgage and car payments first, and eliminate all unnecessary purchases.

Second, consumers shift down their credit card payments from full outstanding balance to minimum payments to conserve more cash.

Third, at the regional/national level, as the consumers’ period of unemployment increases and as the numbers of unemployed increases, this household level behavior translates to more spending moving to credit cards to conserve cash combined with less credit card payments.

There are two key measures to the health of the credit card industry that the industry should be watching in a downturn,
1. The change in the proportion of card holders making minimum payments.
2. The change in the proportion of outstanding debt to card payments.

If both have increased then my intrepretation is correct, if not then this is a good early signal that a recovery is in sight.

Of course if the increase in consumer credit is due to the zero-income survival strategy,  that means that when your cash runs out you default on your card debt. And that is not good news for the banks.

Disclosure: I’m a capitalist too, and my musings & opinions on this blog are for informational/educational purposes and part of my efforts to learn from the mistakes of other people. Hope you do, too. These musings are not to be taken as financial advise, and are based on data that is assumed to be correct. Therefore, my opinions are subject to change without notice. This blog is not intended to either negate or advocate any persons, entity, product, services or political position.

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