Inflation, recession and living off ‘borrowed money’ as credit rises

Recession fears and price pressures have not tamed Americans’ urge to spend money.

Send the news: Credit card balances are defying the pull of persistent inflation and slower growth. They account for about $890 billion of Americans’ whopping $16 trillion in household debt.

What is going on: Spending on experiences, such as travel and entertainment, has supplanted physical goods such as clothing and household items as consumers’ favorite purchases.

“If your costs begin to exceed your income. What are you doing? You look for a pressure relief valve through borrowed money”, investor Peter Tarr said this week in a Twitter thread.

  • Credit is “a smaller option for liquidity, there ‘just in case’ or to ease some costs. Then are loans / refinancing. Home sales, etc.,’ Tarr noted.

Zoom out: For wasteful consumers, a saving grace has been rising wages which, while not keeping pace with rising inflation, are still rising at the fastest pace in decades.

  • They are also supported by an unusually strong job market that has kept the unemployment rate below 4% and given job seekers a lot of leverage.

What we look at: Credit card issuers are catering to Americans’ hunger for debt, primarily by offering travel-related bonuses and cash back on purchases, according to Wells Fargo data.

  • The survey found that 45% of Americans with credit card rewards “rely on their credit card rewards to offset some of the cost of everyday purchases.”
  • Mastercard and Visa both reported rising revenues, even as retailers such as Walmart, Target and Best Buy warned that rising costs were leading to tons of surplus merchandise.

what they say“No one can live on borrowed money forever,” said Ron Hetrick, senior economist at Lightcast this week, linking the labor shortage to rising credit debt.

  • “There are 22 million people in the workforce who use credit cards to pay for their expenses. In a job market with 10.7 million job openings, those potential employees can go a long way in addressing the talent shortage we see across the board,” he added.

Our thought bubble: If the job market remains relatively resilient (the July blockbuster report suggests so) and wages continue to rise (ditto), most consumers will likely find a way to keep the bills paid.

  • But with weak US data fueling recession chatter, none of the above is a given. And either way, carrying billions of dollars of revolving debt with you as growth falls and inflation rises just isn’t sustainable.

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