Up next: credit limit reductions

February 6, 2008

You will know we have entered the next phase of this American economic meltdown when individuals and corporations start to see their credit limits reduced without notice. It’s common knowledge that American Express, MasterCard and others are actively investigating ways to reduce their exposure to high-risk consumers and businesses.

With a tiny national savings rate and a negative personal savings rate, there is no hope Americans will even be able to pay back their existing debts let alone any new ones. These reductions are the main reason reduced interest rates will fail to stimulate consumer spending and will ultimately fail to prevent a deep recession. Business spending has been steady even as consumer spending declines, but eventually business spending levels will follow their access to cheap cash as it catches up to their declining revenues.

It’s somewhat ironic that lenders were loosening standards when interest rates were rising a few years ago and will be tightening standards when interest rates are dropping over the next few months, interfering with the Federal Reserve`s control over the money supply.

Their solution? Inflation.

With each passing day, for those with foreign income streams, the depreciation of the US dollar makes it a little bit easier to pay back old debts. Everyone else will be dependent on cost of living pay increases, but if the government keeps lying about inflation numbers that’s unlikely to happen. In other words, despite the fact some forward looking wealthy individuals and multi-national corporations will survive without much difficulty, the pain felt by average Americans will only deepen.

This party’s just getting started.