When we look at Consumer confidence and listen to the politicians discussing the need for consumer confidence to return and thus consumer spending I cannot help but be concerned. Consumer credit has exploded in the last twenty years and not all of this is good.
In Australia credit card interest rates remain at obscenely high levels and banks have handed out credit cards and increased credit limits at alarming rates. This is both a regulatory failure and a yet another example of banks using predatory practices which are now catching up with them.
Australians owe approximately $45 billion AUD on credit cards and is ranked as the third most indebted nation in the world when comparing total household debt to Gross Domestic Product (GDP), behind the UK and the US. Household debt in the UK represents 240% of GDP, 180% in the US and over 174% in Australia.
Who has not received a letter in the mail offering a credit card with a pre approved limit if you just return a form by a certain date? Who hasn’t seen a television commercial offering credit cards with low introductory interest rates on balance transfers (except for cash withdrawals which instantly are charged at the top rate) to entice people to further increase their personal debts?
I recently saw a TV advertisement from Citibank (In Australia) offering a credit card to people with a 2.9% introductory rate for balance transfers. The small print at the bottom of the screen indicated that cash withdrawals were exempt and would be charged at the full rate – a staggering 20%!
These practices are predatory, immoral and ultimately have the biggest impact on those who can least afford it – they are meant to appeal to those in most need. No person with the financial capacity to ignore the so called offer would respond to it and Citibank knows this. It is therefore no surprise to me that Citibank has created such a mess for itself and taxpayers in the United States. It is little wonder they have relied upon and used hundreds of billions of taxpayer dollars and will require more if they are to continue to trade.
So when looking at re-igniting consumer spending we need to look at it on two levels. Firstly consumer spending with cash and consumer spending on credit. If we fail to break consumer spending into these two basic categories we make the mistake of deluding ourselves that all is ok and simply put off the inevitable.
Many people are over-committed financially with personal loans and credit card debt (apart from mortgages on homes) and if they continue to spend at the same rate they will be forced into bankruptcy.
Consumer spending habits must change for the economic recovery to be long lasting and value must be placed on spending wisely – not on credit cards to further increase personal debt and artificially continue economic growth. We must look deeper at the indicators we are being presented with – increased consumer spending could ultimately be disastrous without taking the credit factor into account.
Thus it may be necessary for a period for the economy to shrink – it may be a fact of correcting economic growth which was too fast or built on poor foundations. Growth for the sake of growth is silly and sometimes we need to take stock of where we are and consolidate.
In 1997 total debt in Australia (including Government and household debt) was just $700 billion AUD. It is now a staggering $3.4 trillion AUD, which represents a massive $110,500 AUD for every man, woman and child in Australia. The former Howard Coalition Government did indeed pay down the public debt, but allowed private debt to soar. This is a problem we do not hear Prime Minister Rudd or Opposition Leader Malcolm Turnbull discuss – they must!
Servicing this debt will only become more difficult as the dollar devalues – the problem is real and when we consolidate and start the process of repair we will not grow at all. If we do we will be growing through debt and correcting mistakes of the past will take years, not months. Future measures of growth need to be more accurate and sensitive to allow for better decision making and earlier detection of potential issues.
Consumer confidence and the subsequent increase in consumer spending is only a small part of the overall equation. It is vital to look at consumer spending in terms of cash and credit to ensure we don’t exacerbate the situation to a point where we allow the mess to worsen. We have some work to do on repairing our level of household debt and growth for the sake of growth is dangerous and has wide ranging implications. To be ranked the third most indebted nation in the world (as discussed above) is a problem we cannot ignore.
NEXT: The MASTERPLAN Part 3: Government Debt