Is The ‘Standard-of-Living’ Bubble Next?

Another reading assignment: The Next Credit Crunch (read it, it’s very interesting). The next bubble according to Geoff Colvin will be a standard-of-living bubble due to a credit card crunch.

…a big crunch is coming – and here’s why. Credit card debt, like mortgage debt, gets bundled, securitized, and sold off by banks. Citigroup, one of America’s largest credit card lenders, just reported that it lost $176 million in the second quarter through securitizing such debt. That happens when the buyers of those securities observe rising delinquency rates and rising interest rates, and decide the debt is worth less than Citi thought. More generally, the amount of credit card debt that is securitized nationwide has plunged by more than half in the past five months because it’s getting riskier. That means credit card issuers will be charging customers higher interest rates, and since the banks can’t offload as much of the debt as before, they’ll have less money to lend to cardholders.

Okay, I’m no market expert or economist, but here’s how I see this playing out:

1. Lots of retailers are going to go under. How many? I have no idea. But, I will say that those that are currently struggling are most likely going to be toast.

2. Lots of restaurants are going to follow the path of the defunct retailers. There’s too much competition and margins are being squeezed by higher costs. Couple that with customers cutting back on their budgets and not having access to credit cards and you have a messy situation.

3. Just about anything beyond necessity is going to be at risk.

I wonder if the government has a credit card bailout in mind?

10 thoughts on “Is The ‘Standard-of-Living’ Bubble Next?”

  1. I have been quietly thinking about this myself. All bubbles will eventually burst, it’s a baseline fact of capitalism. We psychologically rationalize that everything will be okay but this is a very astute point that was brought up and we are in for a ratcheting in on our lifestyles.

    I would include the education bubble as well. So many individuals are getting degrees and there aren’t enough jobs for them. In fact it’s easier and easier to get a degree that new thresholds are for master’s degrees and other programs.

    If you don’t know what you want to do with your education, it’s not worth paying for school, yet the common notion is to pay for school anyway. We look down at tech schools in a way but if I was going to school I’d go to a school that’s going to teach me marketplace ready skills unlike a lot of academia which is acting as just a hoop you have to jump through to achieve certain (mostly unrewarding) positions.

  2. You’re right, Big Winner. Just last Sunday in our Chicago Tribune, Tom Petruno wrote “Frugality enters US mind-set”. He quoted David Rosenberg who is an economist at ML who said “frugality is now replacing frivolity.” Basically with credit tightening, the days of spending carelessly are over. Edward Yardeni, an economist w/Yardeni Research was also quoted: “There’s just no way you can really save out of the median income in this country and retire comfortably.” His point was that baby-boomers who got a late start on saving may just throw up their hands and not even try b/c they see no hope of reaching their retirement savings goal. The author closed with saying that if the “New Frugality” doesn’t materialize, that lack of savings is a time bomb for those who were successful savers.

  3. follow the disappearing jobs. less jobs and less prosperity affect every aspect of our society. cure? adapt.

  4. No question our standard of living is on a bubble. I live in a very inexpensive city about 25% less than the average in the US. But still houses are reasonably expensive, IMO. My husband and I earn well over the national average (he’s a doctor) yet we can’t “sanely” pay the prices some people want for a nice home. Yet we are being outbid by people who are teachers or in similar lower salaried position. I’d say in most cases those people are simply assuming too much debt and perhaps my husband and I are being too cautious with ours.

    The same goes with consumer credit. So many people have so much and you have to wonder how they got it. Only once answer – credit cards. High mortgage + credit card debt + car loans = major standard of living adjustment.

  5. I really hope along with the new found sense of frugality Americans start to develop a sense of quality as well. Wanting as much as possible for as cheap as possible has created quite a few problems with our modern society as well.

  6. Frugality is just another word for “thrift”. There is nothing wrong with buying what you need, spending less than you make, and putting the balance in the bank. Heavens, years ago that seemed to be the norm.

    With our politicians intent on spending oodles more than they take in by taxes, and spending money on idiotic projects, and starting wars they should not be starting (OK, JLP, you and I diverge politically here), this country becomes indebted to the good feelings of Chinese and Russians, who buy our debt. Well, we know how the Russians feel about us right now. I suspect we will irritate the Chinese before long. Then they will sell our treasuries, and we will up deep doo-doo.

  7. It’s time for the people to start living within their means. The frugal way of life will become more and more popular in the coming years and the current savings spike is just the beginning …
    And yes a lot of companies will go south when people slow down their spending

  8. Plamen:
    The frugal way of life will become more and more popular in the coming years

    Riiiiight… Show me one – just one – period in the modern American history when Americans saved money and ddn’t splurge on luxuries. And don’t bother talking about the Great Depression – that was purely out of necessity and people didn’t really have much choice. Do you remember Jimmy Carter’s presidential address in which he urged Americans to conserve power by turning down the thermostat? Didn’t fly. remember how, a few weeks ago, Obama told America to inflate their tires in order to conserve gas? He became (however temporarily) a laughing stock.

    The damage is just too big. We are talking about at least 60 years of living above our means, if you take the late ’40s-early ’50s as a starting point.

  9. I think this is a bit Chicken Little. People who lose their homes due to bankruptcy will clearly also walk away from their credit card debt. It’s the same problem, not a new problem.

    All the money goes to the banks anyway, whether by credit card or by mortgage or both. Everyone’s income remains what it was before, except now the bank owns their assets.

    I’m sure the people who have lost their homes or are being crushed by their homes are not going out to restaurants and buy as many new shoes anyway. That’s general shrinkage, and of course the economy will continue to suffer and discretional spending goes first. But what is the big emergency?

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