There have been massive decreases in consumer credit over the past year. Home equity lines of credit have been reduced and revoked, credit card companies are becoming more selective and lowering credit limits, and well, no one's buying cars or houses. Those standards have also gotten stricter.
The US is a consumer based economy, so this looks bad. In the short term, it certainly is, but it's hard to fault people for saving. It also looks like (God willing) this may become a new trend of responsibility and thrift. We may again be looking at wonderful days when buying a new car instead of a used one is an extravagance, rather than the inverse being evidence you're poor or a tightwad.
What will this mean for the American economy? More spending on better products and services, and more money for small business investments.
It seems paradoxical, but I think it will work. Let's start with the basic fact that credit is expensive, particularly on credit cards. A 29% interest rate is insane, and used to be known as usury. As consumer credit dries up, as people use credit cards less, that interest will not be assessed. Imagine if people spent a similar amount of money as what they do now, but did it on a cash basis, without paying insane interest. Why, they'd have more money. They could save it, or they could spend it. I know that personally, once we paid the cards off, it was another $200.00/month that was going into savings, and we still were able to eat out once more per week.
In this respect, people won't actually be spending less. It's that the industry these funds are spent in will change, at least directly. Rather than going to the finance industry, this extra will be spent on goods and services. In other words, it will be directed toward manufacturing and the service sector, which will make the spending go much, much further. When you pay interest, well, you pay interest. There's not a real multiplier there, or at least not a very high one. When you buy a pastry at a bakery, you're creating demand for the ingredients, which leads to demand for the agricultural products that make them. You're creating demand for mixers and beaters and ovens. You're creating demand for bakers, who spend the money you give them locally. If you eat too many, you're also creating demand for the gym, their equipment makers, employees, and so on.
I mean, yes, there is a technological infrastructure supporting the assessment and collection of interest, but it's concentrated, small, and goes to the creation of demand for more wasteful debt. I'd rather have more bakeries than more credit card companies. And of course, this is all before the late fees, annual charges, and other assorted garbage fees those companies tack on. Your pastry is bound to be more fulfilling than that.
I work in finance, so that should be at least superficially worrying to me, but it's really not. This is because increased saving combined with decreased consumer borrowing leads to cheaper borrowing for businesses, and this is the really good news. If it is less expensive to borrow money to expand your business, and you see the opportunity, you are more likely to do so. That's jobs, people! The financial industry will still make plenty of money, especially if the volume of expansion increases, and it'll be a productive profit, one in which the banks are contributing in a very positive way to the community by allowing greater prosperity, which combined with increased saving and spending from higher wages can lead to a wonderful cycle of supportable, sustainable growth (especially now that we've got good tools for keeping inflation under control).
So Congress and the President, big kudos for reining in the credit card companies. Now keep working toward sustainable growth.