In an effort to revive their economies and spur consumer spending, world leaders are attempting to inject money into many economies around the world.
So, where will all this money come from?
With many world currencies already in bad shape, some governments may decide to monetize their money supply. Simply put, just print money. Turn on the printing presses and print money to throw at these economic problems.
That’s what I believe is currently occurring in the United States.
Printing money without a sound basis for doing so is typically a recipe for inflation to occur at some point. Inflation is defined as too much money chasing a limited supply of goods and services. Even though the US Government is printing money to throw at our economic problems—almost as fast as the printing presses will run—in an attempt to get folks to spend money, so far it’s not happening. Instead, as I’ve stated previously, I believe we’re in a deflationary environment. Consumers just aren’t spending money, a trend I think will continue.
Instead of spending money, consumers are looking to pay down debt, or ‘deleverage’, and there’s a lot of debt worldwide to pay down.
However, there’s another seldom unnoticed dynamic that’s about to come into play that further limits the spending ability of many consumers.
In an article published in “The Philadelphia Inquirer” on May 22, 2009, credit card issuer Advanta announced that as of May 30, its customers would no longer be able to use their credit cards. The company, specializing in credit cards for small businesses, announced it was closing or freezing nearly one million credit card accounts in order to cut company losses and preserve capital.
From the article:
“Earlier this year, the company (Advanta) eliminated 300 jobs, or a third of its workforce, and cut its dividend 88 percent. It posted a first-quarter loss of $75 million, compared with a profit of $18 million in the same quarter last year.
Advanta’s customers defaulted last month at a rate of 20.15 percent, compared with 17.31 percent in March, the company said Monday in a regulatory filing related to the Advanta Business Card Master Trust, which bundles Advanta’s small-business loans for sale to investors.
Outstanding credit card balances at the end of April were $4.5 billion. The company hopes customers will pay off their balances, but it is not clear what business Advanta will have after that.”
This is not an isolated incident. Many credit card companies are re-thinking their policies.
An article published in “The Dallas Morning News” on May 23, 2009 titled, “Beware, Credit Card Issuers May Cut to the Chasing”, described a strategy that may be adopted by many credit card companies called ‘balance chasing’. Balance chasing occurs when a credit card company reduces a credit limit to a level just above the cardholder’s current outstanding balance.
For example, let’s assume a cardholder has a balance of $10,000 on his credit card and decides to make a payment of $1,500 to reduce the balance to $8,500. A credit card company might adjust the credit limit to $8,600, just $100 more than the new outstanding balance. Next, the cardholder makes another $1,500 payment in order to get some breathing room on his card reducing the outstanding balance to $7,000, and when he does, the credit card company reduces the credit limit to $7,100, again just $100 more than the outstanding balance. Hence the term ‘balance chasing’.
Curtis Arnold, founder of creditratings.com, a credit card ratings website, was quoted in the article when referring to balance chasing that “more people are going to hear about it.”
The practice of balance chasing can hurt consumer credit scores because it looks like you’re using a larger portion of your available credit. But Arnold says, “They (the credit card companies) figure by retiring your available credit, you can’t go out and charge any more. They don’t care about your credit score; they care about their exposure.”
In light of these facts, I expect the deflationary environment to continue for a period, and then, at some future time, I expect to see considerable inflationary pressure since it’s doubtful the government and the fed can remove the excess money out of the economy in time. What will be the result of a tightening money supply? Typically it’s an economic slowdown. This is the reason that even in spite of a few bright spots like the market rally that we’ve seen lately, I don’t foresee the economy improving significantly before 2012.
This is an excerpt from my recent Market Outlook. For a full copy, click here: www.usawealthmanagment.com
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