Thank you to Mr P for suggesting this week’s topic as we explore what is happening in consumer credit. To our avid readers, please do send us in requests for future post topics. As a family office we don’t take views, but luckily we have an opinion on just about everything. We promise we will turn around your requests relatively quickly and we hope you continue to enjoy reading our blog.
Consumer credit is something I first came across during my time in America, in the late eighties. Back then I was a student, on a very tight budget indeed. But to my amazement, I was able to open bank accounts, acquire credit cards, store cards, or get student loans and even car financing. All I had to produce was a social security number and a fixed address.
And whereas I did wonder how on earth is this possible, I also noticed something else: if I was late for one payment on any of my many fancy new cards, there were severe penalties and disproportionate (read: high) fees to pay. Back then, you had to mail in cheques for every payment and I remember spending the better half of an afternoon each month paying my bills. The likelihood of missing a payment was actually quite high, if one wasn’t very diligent. And therein lied the rub: all of these enticements came at a potentially very high price. All of a sudden, the fine print, the one that says that you owe 39.99% APR in interest charges for any outstanding balances, sent shivers down my spine.
None of that stopped the hungry consumer though, and the world has since gone onto a binge of buying goods on credit of epic proportions. Not entirely coincidentally, this has fuelled the global economy, creating jobs, growth and prosperity for people everywhere. It has become an almost virtuous cycle, whereby one consumes and the other produces, one begets another and endless gains for everyone. But of course, we all know that if we borrow something we are expected to pay it back some day, and the friendly folks at the other end (who gave me credit) will make sure of that.
So, let us look at the obvious conclusions: debt has been spiralling out of control for many decades. That’s not good. Rising interest rates in this environment is bad. Adding to a mountain of debt by taking on new debt to pay off the old debt is very bad. This is the Armageddon argument and it is as plain as night and day, that it will all end in tears. When? Ah, well that’s another discussion. Have I mentioned it has been going on for more than thirty years?