Forced Consumer De-leveraging

Frugality may be a fad, but as I have been reporting, the end of easy credit will force consumers to pinch their pennies whether they want to or not. The days of easy credit are finished. Reuters Columnist James Saft describes the coming shift in the consumer credit landscape. The changes being proposed will gut the availability of consumer credit and will restrict the use of credit cards in the United States. Saft writes in his piece “Credit cards unkindest cut for U.S. consumers”:

Meredith Whitney, the Oppenheimer and Co analyst who has so far been ahead in identifying and explaining the weaknesses in the banking system, thinks over $2 trillion of credit lines, or 45 percent of lines available, will be pulled out from under American consumers in the next 18 months, a figure that puts the Fed’s $200 billion for asset backed finance in its proper perspective.

“We are now entering a new era within the financial landscape that will be characterized by expanded forced consumer de-leveraging with a pronounced downshift in consumer spending,” she wrote in a research note.

“We view the credit card as the second key source of consumer liquidity, the first being their jobs. Pulling credit at a time when job losses are increasing by over 50 percent year-on-year in most key states is a dangerous and unprecedented combination, in our view.”


Whitney notes that the three largest credit card lenders, Bank of America, Citigroup and JP Morgan, who between them account for more than half of U.S. credit card outstandings, have each discussed reducing card exposure or slowing growth. Capital One and American Express, who are another 14.5 percent, have also talked about limiting lending.

De-leveraging, a word we have already defined. In simple terms, consumers will have to pay off their existing debt, and to do this they will have to spend less and save more. In other words, consumers will have to embrace frugality whether they want to or not, as they will no longer be able to rely on credit cards to fund purchases they cannot buy with their savings.

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One Response to Forced Consumer De-leveraging

  1. Pingback: Forced Consumer De-leveraging « The Penny Pincher’s Weblog

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