June Credit Card Collapse Report

On June 5, the Federal Reserve released its monthly report on consumer credit. The first quarter drop in revolving credit was revised from 60.4 billion to 66 billion. The preliminary April data shows a 3.4 billion drop. So far this year the rate of decline is 7%, or 21% annualised. We expect as April data is revised, this rate will actually be considerably higher.

If the flow of credit is indeed the "life blood of the economy," as Mr. Obama states, then the USA has arterial sclerosis. Our opinion, of course, is entirely the opposite: the economy can be quite fine without consumer credit. The World got along fine for thousands of years without consumer credit and may again.

The flow of credit is only the life blood of banking profits. American households will of necessity become thrifty in the years ahead or face ruin. Banks will be increasingly cut off from the once fat profits of consumer lending. Their rump loan portfolios will soon turn into capital-annihilating loss generators.

It's a little known fact of lending that you can cover up dodgy portfolios by expanding quickly. Since loans sour as they age, if you keep a loan portfolio new (by always adding more and more accounts), your percentage of delinquent loans will seem low. If your growth stops, or even reverses, your deadbeats can't be hidden so neatly.

The result of that phenomenon as it applies to the current situation is that bank losses on their consumer credit book should begin to really mushroom over the next few months. Don't buy the media announcement of 'unexpected' increases in credit card delinquencies. The banks know its coming, but you read it here first.