by Peter Schiff, Schiff Gold:
Americans continue to bury themselves in debt.
US consumer credit rose by the largest amount in 11 months in October, as Americans piled on another $25.4 billion in debt, according to the latest consumer credit report by the Federal Reserve. Total consumer indebtedness is rapidly approaching $4 trillion, with Americans currently $3.96 trillion in the red.
October’s debt increase followed on the heels of an upwardly revised $11.6 billion increase in consumer credit in September. Year-on-year, consumer debt rose a seasonally adjusted 7.7%. American indebtedness was already at record levels before the latest increase.
The consumer debt figures include credit card debt, student loans and auto loans, but do not factor in mortgage debt.
Americans were burning up their credit cards in October. Revolving credit outstanding increased $9.2 billion. This despite increased borrowing costs due to rising interest rates. Credit card debt is climbing at an annual rate of 10.75%.
In a recent podcast, Peter Schiff said this is a sign the economy isn’t as robust as pundits keep telling us.
If an economy really is strong, you would think consumers would be taking on less credit card debt because they wouldn’t need it. They would be able to buy more stuff that they could actually afford. They wouldn’t have to go into debt. Because credit card debt is the worst possible debt because the interest rate is so high on credit card debt. If you can afford to pay off your credit card, you’re going to pay it off.”
Given the cost of carrying a high credit card balance, most people who do so do it because they don’t have a choice.
They don’t have the money. They can’t afford to pay the credit card bills when they come. And so all they do is pay the absolute minimum that you’re allowed to pay, and that means the balance never goes down. And so the fact that you’re seeing this surge in credit card debt, I don’t think that indicates the economy is good. I mean, some people think, ‘Oh yeah, when the economy is booming, people are more apt to go buy stuff.’ Yes. But not on credit. They’re more apt to buy stuff with their higher income, buy stuff that they can afford. If credit card debt is going up, it’s generally a sign that the economy is weak. People are desperate. They’re trying to make ends meet. The cost of living is going up faster than people’s paychecks. So, they are briding the difference using the only lifeline available to them – credit cards.”
Credit card debt will put an even tighter squeeze on consumers if interest rates continue to climb. Credit card APRs have increased by more than 3 percentage points over the past two years. The average rate now stands at 16.6%. That means consumers have to fork out an increasing amount of money each month just to cover minimum payments.
Non-revolving credit, including auto and student loans, climbed $16.2 billion in October. Outstanding student loans stood at $1.44 trillion at the end of the third quarter.
Consumer debt may well cross the $4 trillion threshold before the end of the year.
Consumers aren’t the only ones burdened by debt. The federal government in a massive debt spiral of its own. Corporate debt also stands at record levels. As Peter put it in a podcast earlier this fall, the economy is a bubble and the air filling that bubble is cheap money.