Wednesday, October 22, 2008

The next crisis

(graph from here, via Obsidian Wings)

Americans are increasingly unable to cover their credit card debt. What does this mean for the economy? Well, several things:

First, with their customers increasingly defaulting on their loans and credit card debt, banks will be much more stingy in their lending. People who depend on loans to get by will have a harder go of things.

Second, consumers will inevitably scale back their spending, reducing aggregate demand and business profits, which in turn has a negative effect on employment. Unemployed people don't spend much money either, which just reinforces this downward spiral.

This is what happens when a central bank tries to avoid a recession at all costs.

Economy not doing so well? Here, have some easy credit! Borrow money and spend it on shit from China. Oh, and buy a house, and use it as leverage for even more borrowing. And in the meantime, the fat cats on Wall Street will get rich by repackaging and reselling all your debt. Everyone's happy!

...until the bill comes due. We've seen the effects; a housing bubble popped, financial institutions crumbling under the weight of bad assets, credit markets in a deep freeze, and now the impending death of the omnipotent American Consumer.

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