Owing for Yesterday’s Pleasure

Spending borrowed money can be fun, but paying it back rarely is. However, that is how the financial system works in America.  A person looking to spend more than they have available borrows money from another source which has more money than it needs at the same moment in time.  This can go on and help fuel an economic expansion for a while but not forever.

Consumers have amassed a pile of debt in the current expansion.  For the first time ever, total consumer credit in America reached $5.0 trillion.  This happened as consumer credit outstanding rose $23.7 billion in November 2023 alone.  November’s surge translates into a 5.7 percent annual gain, far outpacing October’s 1.4 percent uptick.  Revolving credit (e.g., credit cards) soared at a 17.7 percent rate, the largest monthly gain since March 2022.  All of this expanded debt is costing consumer record interest rates.  According to the Federal Reserve the Commercial Bank’s are charging consumers an average of 21.47 percent, a price which is even higher than in the early, high inflation 1980s.

Payment for debt accumulated today typically comes from income in the future.  A portion of tomorrow’s earnings will be dedicated to paying for yesterday’s spending pleasures.  This works well in the period the borrowed money is spent but diminishes tomorrow’s outlays.  Therefore, today’s levels of debt raises questions about sustainability. 

Credit goes through cycles, and there is growing evidence that the current cycle stage is one where consumers have more difficulties paying back money they owe.  Recent fun had during the debt-driven consumption could morph into tomorrow’s financial hangover.  Delinquency rates in the third quarter of last year were the highest since the same period in 2013 when the aftermath of the Global Financial Crisis was still being felt.  There is no such thing as a free lunch, especially one paid for over time on your credit card.  It is growing more evident that tomorrow’s income is being spent today at a faster pace, leaving less available to keep the economy growing in the months and quarters ahead.  As we stand at this crossroads of consumption and caution, one thing becomes crystal clear: the bill for yesterday's pleasure is due today, and it's a cost that extends far beyond the bank balances of many.