Saturday, January 05, 2008

Warning: Tainted economic leftovers

“If the credit crisis worsens…” In a recent post - Swing your partner to the left then dosado I noted the regularity of economic boom/bust cycles, contrasting that with the broader ‘political/economic’ dynamic. I was upbeat on the latter, but the fact is we are in for a rough trip on the former.

But what happens if the credit crisis worsens? The basic dynamics of our various economic issues differ, but the US is harbouring a smouldering bomb which will make the sub-prime crisis looks like piggy bank stuff - Subprime fiasco may prove to be tip of the iceberg.

Even without the looming concerns over excessive corporate lending, the arcane multi tiered exposures, there is the almost immediate concern over an unsustainable Christmas spend up. This is not simply a US issue, it seems fairly universal. Look at some of these comments:


LONDON (Thomson Financial) - Christmas overspending, higher mortgage costs and the global credit crunch are likely to trigger a 9.1 pct rise in personal insolvencies in the UK in 2008, insolvency experts said.”

“Debt experts are predicting a record number of personal insolvencies this year as excessive Christmas shopping, rising mortgage payments and soaring food and fuel costs force thousands of people over the financial edge and into bankruptcy.

More than nine million individuals in Britain are now believed to be struggling to pay credit card bills and mortgages, with the average owed by problem debtors hitting £30,000.”


“HIGHER interest rates and soaring fuel prices have not curbed Australians' enthusiasm for festive shopping, with a record $36.5 billion spent in the lead-up to Christmas.”

A drop in the bucket? Remember the Aussie population is smaller than that of greater Los Angeles, just 21 million. . Estimates suggest the total spent on credit cards in December was $20 billion. Australia's credit-card debt was expected to hit $43 billion by the end of the year, at an average interest rate of 12% and a max of 19%.

The message already is:

“CONSUMERS who default on their post-Christmas credit-card bills could swiftly be declared bankrupt and have their homes auctioned to meet their debts as the banking sector tightens the screws”


According to The Associated Press, Americans are in the hole about $900 billion with their credit cards, an average of $2,200 per household. Even in a strong economy, credit counselors are familiar with the debt hangover that strikes many of Santa's elves when January's bills arrive.

The new Aussie PM has hardly had time to put his boots under the desk and is faced with an enormous task in stabilising our economy. We are still hoping he will kill off tax breaks which can only fuel inflationary trends. Jeez, they didn’t even come close the Christmas spending, so they aren’t going to benefit anyone.

Britain’s Gordon Brown is floundering in the wake of Tony Blair. Brown's short prime ministership has been marked by vacillations and poor judgment. After an almost comical number of crises and cock-ups, the Government is at its equal lowest level in the polls since it took power in 1997. SMH

We know the US is just over halfway into a changing of the guard, but there are some wonderful signs of a congress and the US Fed wanting to make changes. Think about this seasonal credit card splurge, it isn’t much separated from the sub-prime mess (or the potential corporate disaster).

Lenders are all too ready to lift limits on cards without reference to a borrower’s ability to repay in a timely fashion. Our governments and central banks must put pressure back on the lenders to justify their lending policies. They sell greed, then expect to be able to punish everyone else when they fail.

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