Spike in Consumer Spending Spells Danger

Posted on Aug 15, 2011

Flickr / 7bikeframesweldedtogether

Consumer borrowing shot up $15.5 billion in June—three times more than projected—in the biggest increase in credit in four years, with credit card and other types of revolving debt rising by $5.21 billion—the largest jump since spring of 2008. Why? As other sources of capital, including income from employment and equity lines, are shrinking, people are paying basic bills with credit cards. And without a means to repay those debts, plastic credit is merely a temporary lifeline, and “another round of defaults” is likely in store. —ARK

AlterNet:

Amidst a lot of indicators that say we could be heading for another round of recession—before the so-called recovery even reaches most people, let alone our millions of unemployed—June saw a jump in consumer borrowing, three times as much as expected, according to Bloomberg News. The $15.5 billion increase in credit was the biggest since August 2007, and revolving debt, which includes credit cards, was up by $5.21 billion, the most since March 2008.

... So why the jump in buying on credit, if people still don’t have money to spend? Carlos X. Alexandre at Seeking Alpha explained:

“... The most logical interpretation is that as other sources of cash are drying up – jobs, equity lines, etc.—consumers are now turning to credit cards for basic expenses, and as credit lines become exhausted another round of defaults is in store. Some may say that cash sales are not reflected in the data, but the American way of life and the core economic engine has been plastic-based for as long as we can remember, and is not about to change anytime soon.”

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