Americans Are Still Running Up Their Credit Cards; Consumer Debt Sets Another Record

Americans Are Still Running Up Their Credit Cards; Consumer Debt Sets Another Record from Schiff Gold

Americans are buying stuff. Retail sales were stronger than expected in June. Auto sales increased by 0.7% after a similar rise in May, helping boost total retail spending. Overall, retail sales were up 0.4% last month. The Commerce Department revised May sales down from 0.5% to 0.4%.

Increasing retail sales would seem to be a good sign for the economy, but the latest consumer credit numbers reveal an underlying problem. Americans are buying a lot of this stuff on credit. How long can consumers keep running up credit cards before the bubble bursts?

American consumers took on another $17.1 billion in debt in May, according to the latest data released by the Federal Reserve. This comes on the heels of a $17.5 billion increase in April.

Americans currently owe nearly $4.9 trillion – another all-time record.

The consumer debt figures include credit card debt, student loans and auto loans, but do not factor in mortgage debt.

Revolving credit surged up another $7.2 billion in May. That represents an 8.2% increase. Americans’ now owe over $1.07 trillion in credit card debt.

Non-revolving credit, primarily auto loans and student loans, increased 3.9% to nearly $3.2 trillion.

Total household debt, including mortgages, topped the 2008 peak before the financial crisis back in 2017. Since then, the debt bubble has continued to expand. Even with the Fed’s interest rate hikes in 2018, rates remain artificially low. This has allowed the American consumer to continue running up those credit cards.

The mainstream views increasing consumer debt as a positive. Business Insider reported, “Consumers are the lone bright spot in the economy outlook, as business investment and manufacturing have been looking weaker. So, the continued growth in credit is seen as a positive sign for growth in coming months.”

We also hear pundits saying increasing credit card bills are good because it shows Americans feel more comfortable taking on debt. Of course, nothing in the statistics proves this. It is just as likely consumers are running up their credit card balances because they can’t afford to pay their bills. If Americans are working, earning more and enjoying the benefits of tax cuts, why are they running up the credit cards? It seems just as likely they are charging it because they can’t make ends meet. And what happens to the US economy when the credit cards get maxed out?

How long can an economic expansion built on debt actually last?

At some point, you have to pay the bills.

The Fed’s monthly consumer credit report does not include data on credit card delinquencies, but as we reported in April,  subprime credit card charge-offs remain at levels reminiscent of the Great RecessionAuto loan delinquencies have also surged to the highest level since 2011 and are approaching levels seen at their peak during the Great Recession. In other words, borrowers at the lower end of the income scale are already having trouble paying their bills.

The central bankers don’t talk about it publicly very often, but the ever-increasing levels of debt almost certainly have some influence on the Federal Reserve’s monetary policy. The central bankers depend on easy money and credit to keep the bubble economy inflated. Peter Schiff has talked at length about the fact that the Fed will have to cut interest rates and launch additional QE to keep the stock market from crashing. The central bank may well also need to push rates lower in order to keep the consumer borrowing train on the tracks.  That’s the whole point of loose monetary policy and it helps explain the “Powell Pause” and the likely rate cut on deck for this month. The Fed simply can’t raise interest rates to anything resembling normal with Americans making payments on over $4 trillion in debt. That train can only rumble down the tracks for so long. At some point, the debt bubble will burst.

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Peter Schiff

Mr. Schiff began his investment career as a financial consultant with Shearson Lehman Brothers, after having earned a degree in finance and accounting from U.C. Berkeley in 1987. A financial professional for more than twenty years, he joined Euro Pacific in 1996 and served as its President until December 2010, when he became CEO. An expert on money, economic theory, and international investing, he is a highly sought after speaker at conferences and symposia around the world. He served as an economic advisor to the 2008 Ron Paul presidential campaign and ran unsuccessfully for the U.S. Senate in Connecticut in 2010.