Thursday, November 6, 2008

A Familiar Story

News crossed the wires this morning on Bloomberg that for the first time in 15 years the month of October saw no purchases of bonds backed by credit card debt. Zero. How much was purchased last year at this time? $17 Billion.

What does that mean?

In the same fashion as housing loans over the past few years, credit card companies sent credit cards to every American in the country with a pulse. They told them to spend away with almost no limits. When the Americans started to spend, the credit card companies then bundled that debt into bonds and sold them into the market to investors. (Foreigners) This allowed them to continue to increase the amount of debt without keeping it directly on their books, and the amount of debt surged.

Now, the debt is starting to default, just like home loans. This has spooked investors who buy those bonds in the open market. This means if a credit card company wants to offer credit they have to take that risk on their books. Obviously, they will not do that because they know they are lending money to Americans who cannot pay it back. When you send the debt to someone else for it to default on, it is much more attractive.

What you'll begin to see now, as an example, are statements arriving in the mail telling you that your credit limit has been reduced from $5,000 down to $500. You'll begin to see a lot less cards arriving in the mail telling you that you are instantly qualified. This will not happen tomorrow, but gradually over the next few months.

This will be a crushing blow to Americans who now depend on the credit cards to cover the difference in the cost of living every month. More and more loans will begin to default, and the market will continue to tighten.

In response to a tightening of lending standards for home loans to Americans, (the free market working) the government nationalized Fannie Mae and Freddie Mac. Will they do the same with the credit card companies and stand behind all their debt? If they do not then the end of our spending binge may finally be over, and our country can begin it's true economic collapse.

GM announced yesterday that they will know in the next few months if there will be an American car industry at all. The government has the same decision to make with the auto manufacturers to decide if they will stand behind their debt.

http://www.bloomberg.com/apps/news?pid=20601087&sid=aajOmDkW3xeE&refer=worldwide

Fantastic article written today:

http://www.financialsense.com/fsu/editorials/schiff/2008/1105.html

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