Wednesday, July 09, 2003

In the quest for the elusive answer to the General's persistent question -- 'how is all this overproduction going to get soaked up?' -- the answer of late has tended towards consumer debt. The obvious consequences are rearing their heads as well:
More Americans struggled with their credit card bills in May than a year earlier, as rising job losses took a toll on cardholders' ability to meet monthly payments, Moody's Investors Service said on Wednesday. . . . Moody's delinquency index on credit card payments 30 days late rose to 5.20 percent in May from 4.86 percent a year ago, but declined from 5.25 percent in April. The year-over-year delinquency rate has risen in the past four consecutive months, Moody's said. . . . May's charge-offs, the annualized rate that credit card issuers write off accounts as uncollectable, rose to 7.05 percent from 6.46 percent a year ago and from 7.0 percent in April. Moody's said hefty bankruptcy filings continued to force credit card companies to write off more accounts. May bankruptcy filings were up about 10 percent from year-ago levels.
Since wages and overall compensation are not rising anywhere near fast enough to consume output in the United States, and since the rest of the world is in no position to soak up excess US production, consumers are having cheap debt opportunities thrown at them like rotten tomatoes at a cheap Puritan harlot. Debt opportunities need to be so available in order to prop up consumption, but consumers at the margins cannot keep their heads above water.

The magic act is keeping the pyramid scheme alive. As long as nobody cuts off the lending, the pyramid grows and grows and can even survive a small overall number of bankruptcies. If large amounts of debt go bad, the choice in the current context is either cut off the loans provoking recession and deflation, or finance bad loans in perpetuity a la Japan and live a zombie life indefinitely. The zombie scenario is highly unlikely in the socially corrosive US economy. Watch out for cutbacks in consumer debt due to bankruptcies which could bring the pyramid scheme to an unpleasant end.

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