Consumer borrowing rose again in November as credit card debt shot up by the largest amount in six months.
The Federal Reserve reported Tuesday that consumer borrowing climbed at an annual rate of 7.4% in November, far higher than the 1% rise in October.
The category that includes credit card debt surged at an annual rate of 11.3%, a six-month high, an indication that shoppers were relying heavily on credit cards to finance purchases since home equity lines of credit became harder to get.
Not that this article is talking about what took place in November, traditionally the beginning of the holiday shopping season. We are evidently seeing that a lot of holiday spending was on credit (which I explicitly told people not to do!), and if we see reports of further borrowing on credit from December, I will not be surprised. Coupled with the fact that we have seen rising numbers of defaults on lines of credit, I think we are beginning to see that for many members of the middle class, ready cash has already run out. This may, for now, be mostly to people who were very over-extended to begin with. Naturally, most of those would be lower middle class, or whatever you want to call it. They are the segment that credit card companies did feel safe in giving credit cards to and who took out subprime mortgages. However, the article also tells us:
The five-year housing boom had prompted a lot of homeowners to refinance mortgages and take out home equity lines of credit to take advantage of the surging values of their homes -- a boom that is being reversed in many parts of the country by the housing slump.
Those would be a lot people who did not have subprime mortgages. Most people with houses on variable-rate mortgages (subprime or no) would probably have looked into it, and I'm sure many people did it. This means that the crunch must be hitting a lot of solidly middle-class people. Not the kind of people who exist on low margins of debt, but those who live pretty near their means already, whose priority is not on getting cards paid off as quickly as possible when they have kids, a house, cars, cable, etc. I would not be surprised if we see another surge in home foreclosures as lines of credit run out for more and more people who were unaffected by the first wave of mortgage adjustments.
Federal Reserve Chairman Bernanke now says he's ready to lower the prime interest rate again:
"We stand ready to take substantive additional action as needed to support growth and to provide adequate insurance against downside risks," he said.
That's a lot of words to say that he's going to lower the interest rate, but then, I guess you have to make it seem more important when the only decision you make is to lower an interest rate. Anyway, it may spur growth, but that may not be enough. We'll have to monitor economic news throughout January, but I can predict with some certainty that as Americans' credit continues to run out, we'll see a huge fall in consumer spending into the new year (remember the terrible holiday season) coupled with yet more foreclosures. As more people end up without any money at all, we'll begin seeing more job losses due to lowered spending. The question is how long it will continue on.