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Sunday, August 31, 2008

"The Death of the Credit Card Economy"

Consumer credit is drying up. If consumption begins to fall because of it, what will replace it, investment, government spending, net exports -- or nothing? With credit markets as they are, investment is unlikely to pick up the slack and may fall itself, and a sustained fiscal policy response seems unlikely (and monetary policy is already doing all it can to breathe new life into financial markets). That leaves net exports. So far, so good, but how much burden can it carry?:

The Death of the Credit Card Economy, by Daniel Gross: The most revolutionary notion in commerce today is one of the oldest. If you want to buy something, you may actually have to pay for it. We are reverting from a "borrow and buy" economy to the "cash and carry" model of our grandparents. ...

Students returning to college are finding that student loans have vanished. Retailers who freely extended credit to any customer with a pulse are deploying bean counters armed with sophisticated software to sniff out potential deadbeats. And when higher rates and fees don't deter their borrowers, credit-card companies resort to slashing credit lines. "We predicted there would be some degree of spillover from the mortgage meltdown," said Curtis Arnold, founder of CardRatings.com. "But the credit line reductions by big credit card companies in the last six months have been fairly unprecedented."

This shock to the system may further damage the already-fragile psychology of the consumer. Writing a check or deducting the price of a pair of shoes directly from your bank account packs a much more potent emotional punch than charging ... on your American Express platinum card. ...

The availability of credit also changes the calculus people use to determine what they can afford. Blowing $6,000 on a week in Tuscany might be tough to swing if you have to pay for it all next month. Convince yourself it's a once-in-a-lifetime experience that you can pay for over three years, and it becomes a bargain. With credit, Saturday night means dinner and a movie. When you pay cash and have a fixed budget, it's dinner or a movie.

The tightening of credit is forcing more people to confront these uncomfortable choices. ... In effect, the lack of credit makes things seem more expensive to consumers...

    Posted by on Sunday, August 31, 2008 at 12:42 AM in Economics, Financial System | Permalink  TrackBack (0)  Comments (58)


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