Interest rates

The Time for Usury Limits on Credit Card Interest Rates

Inflation rate in the United States, on the rise; GDP growth, down. European growth is slowing down. The Chinese currency down 4.2%. The Russian invasion of Ukraine is disrupting major supply chains as if they had not withstood serious and largely self-induced long-standing wounds. Higher raw material prices.

The combination caused a lot of concern. For example, the headline in yesterday’s US edition of the Financial Times: “Dismal data fuels fears of stagflation”. (Sorry, no free link.) Other posts have discussed stagflation, although it’s normally seen as a combination of slow economic growth and high unemployment. The latter is far from high, however, when it comes to economy, who knows? With job growth outpacing available people, millions of people still working part-time because they can’t get full-time work, and labor force participation still lower than in the pre-pandemic period, there is may have an equivalent effect.

The Fed has an interesting choice next week. Will he drop the likely 0.5% interest rate hike next week due to fears the economy could collapse? Or is it maintaining current levels when inflation could continue to rise?

A nice consideration for those who are relatively comfortable and able to handle waves of economic uncertainty. But there are already bigger issues with interest rates in gear. Consider the current state of ordinary credit card debt, as shown in the chart below.

Consumer credit usage may explode as the country tries to pull itself out of a recession – note the 2010 surge after the 2007 to 2009 global financial crisis and the slump, after usage fell because people default, lose credit, or try to pay it back for security.

Credit use has mostly increased since then, dwindled during the pandemic — with relief money helping people partly dig a hole — and then started to pick up in the first quarter of 2021 when things looked to be looking up.

Now consider the high card interest rates. Like recently notedthe average New Card Percentage Rate (APR) average was 16.36%, the highest since April 2020. Rates are also going much higher.

The country seems addicted to credit card debt. There are a few reasons. The first is that they provide unsecured access to credit. People don’t need to pledge assets against access. This is considered riskier than something like a car loan or mortgage, where there are assets to be recovered in the event of default. But what risk?

the delinquency rate– not default but default – on credit card loans from all commercial banks, from 1991 to October 2021, at the height of the Great Recession of 2009, was 6.61%. Towards the end of 2021, it was 1.62%.

Imputation rate? They reached 11% in the second quarter of 2010, once again clearly due to massive unemployment and the loss of their homes. Charges were 4% at the start of the pandemic and at the end of 2021 1.6%

This all sounds a lot safer than the “We’re taking a big risk” talk about financial services.

The other big reason for using credit cards is that issuing companies, businesses that sell things, and others are all pushing the “convenience” of cards. The seller of the product more easily closes business. Financial services companies do interest doodles. Points, cash back percentages, interest free periods, special offers, these are all techniques to emotionally manipulate people into using their cards because many will have a balance. Credit card companies don’t want consumers to regularly pay off their debt because they’re not making as much money.

It becomes a modern indentured bondage. People are being sold into levels of debt that they can’t understand until they’re deep in it. Real money is made on those with lower incomes and easier to trap and then pump for years, a ready source of green blood issuers can brag to investors.

Even if the industry wants to present all of this as a service to consumers who are not in the upper quartile of economic situation, it is ultimately not a help if it leaves people constantly struggling. Consumers are the engine of the economy, as they generate around 70% of GDP. Would it be less without credit card spending? Probably, but the trade-off would be greater stability, predictability and public morality.

The government could do something about this by recognizing an effective usurious rate of interest and putting a stop to turning people into the fiscal equivalent of mountains of bodies in cells supplying power to soulless machines in the movie The Matrix.

Will the elect do it? It would be surprising if any of them mentioned it. Financial services are so sacrosanct that even when their disreputable and predatory actions have plunged the world economy into abyss, they have still been bailed out, especially if they were “too big to fail”.

The country needs to shift its priorities more towards the hundreds of millions of ordinary citizens and their needs to strike a better balance. Businesses exist to serve society. Unfortunately, the relationship is the opposite.