First They Cut-Off My HELOC, Now My Credit Card

We as a nation rely on consumer spending to fuel our economic engines. Unfortunately that spending on the luxurious goods and services has come from money we do not yet have - debt! When housing values were rising we could just cash in some of the equity to fund our lifestyles. Now that money is no longer available so we have turned to credit cards to bridge the gap between what we spend and what we make. However that can not last forever.

People are constantly falling in too much debt - but we usually blame the person not the system. Now the system is changing because it was not sustainable. When housing prices first started falling we (collectively) had our HELOC lines shut down. Now the word is that our credit cards will be cancelled across the board as well. And the source is one of the best around - Meredith Whitney. In this article titled Credit card industry may cut $2 trillion of lines: analyst from Reuters we get a glimpse at what will probably be the future. Lets take a look -

The U.S. credit card industry may pull back well over $2 trillion of lines over the next 18 months due to risk aversion and regulatory changes, leading to sharp declines in consumer spending, prominent banking analyst Meredith Whitney said.

The credit card is the second key source of consumer liquidity, the first being jobs, the Oppenheimer & Co analyst noted.

"In other words, we expect available consumer liquidity in the form or credit-card lines to decline by 45 percent."

...
Mortgages and credit cards are now dominated by five players who are all pulling back liquidity, making reductions in consumer liquidity seem unavoidable, she said.

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She also said credit lines to consumers through home equity and credit cards had been cut back from the second-quarter levels.

"Pulling credit when job losses are increasing by over 50 percent year-over-year in most key states is a dangerous and unprecedented combination, in our view," the analyst said.

With 70% of the GDP reliant on consumer spending, these cutbacks will just compound the sprial downward into a depression or, at minimum, a long, hard recession.

As we are constantly stating (see here, here and here), a new economic paradigm will have to arise out of this rubble. We can not have a sustainable system that is built on a huge gap between spending and earning. It is going to be rough, but hopefully the what emerges on the other side is better.