Wednesday, December 17, 2008

So, is there a problem?

In a recent Anchorage Daily News, the above-the-fold headline read Economy's woes nipping at Alaska

Among other statistics cited, some not particularly alarming -- average single family house prices are unchanged from 2007, and up on 2006 -- there is this: Alaska has the highest average debt on each credit card in the US: $2486, compared to the US Average of $1742. This is supposedly a Bad Thing.

Oddly, the story neglected to mention where Alaska stands in US rankings for income.

I will help them, despite the considerable research sacrifice.

(Hack stop watch. 83 seconds later ...)

Alaska is 4th, with a median income of $64,333, compared to the US median of $50,740.

To give these numbers a little perspective, the per-credit card debt is about $280 higher than the proportional income difference.

Among other things the story neglected to mention, either with respect to the US or Alaska, was the number of credit cards per credit card holder.

(Hack stop watch. 97 seconds later ...)

That would be 1.78 (164 million credit card holders, 292 million active credit cards). That makes for $3000 in US average credit card debt.

While I have singled out the ADN, The Economist is no better; a story of several months ago cited around $3000 in average credit card debt, but made no effort to put that in the context of income, or how much of that "debt" was merely using a credit card instead of cash for most, if not essentially all, transactions.

Extending my previous "needs some 'splainin" posts (here and here), is this a problem?

The tenor of this, and all other similar articles, is doom spiced with gloom: the level of indebtedness will both worsen and prolong the recession. In context, the level of credit card debt seems rather less than apocalyptic; however, the absence of defined terms -- credit card as cash substitute, for just one instance -- quickly erodes any ability to make sense of the stories.

Which makes me wonder how the journalists manage to convince themselves they are saying anything worth reading.

So, as with the savings rate, where I still dunno, I dunno.


Blogger David said...

This comment has been removed by the author.

December 17, 2008 3:38 PM  
Blogger David said...

I've seen lots of meaningless statistics, but debt per credit card is right up there.

December 17, 2008 4:21 PM  
Blogger Hey Skipper said...

In the sense The Economist used it (I'm working off memory, and it is too late for me to find the link), credit card debt could worsen the recession.

By their reasoning, if a sufficiently large number of people are living right at the limit of their means, then the possibility of having their means reduced will cause a huge drop in consumption, thereby worsening the depth and duration of the recession.

Intuitively, anyway, that makes sense.

However, it relies on a couple notions: that the average balance on credit cards (which is what the cited numbers really are) represents "debt".

In the absence of actual facts, I shall extrapolate from personal experience. In any given month, our credit card "debt" is right about the national average.

Since we pay off our balance every month, what the article would call "debt" is really cash in a different guise.

Even more damning of every bit of reporting of this subject I have ever seen, the overwhelming majority of the charges are for necessities: food, clothing, gasoline, and the odd trip to Home Despot.

Which brings me right back to what my central charge here.

A great deal of economic reporting is worse than useless. The reporters do virtually no reporting and even less research.

They then toss the steaming heap under an apocalyptic headline, enough of which can start to create their own news.

My take is that once cash-like transactions for necessities are subtracted, the remainder is not particularly large.

But with the abysmal reporting on this subject, who is to know?

December 17, 2008 10:24 PM  
Blogger David said...

But this is a "per card" number, right? So be even approach meaningfulness, it would have to be true that the number of cards people have varies directly with their income/wealth. In fact, my impression is that it's the opposite.

December 18, 2008 5:24 AM  
Blogger Harry Eagar said...

Maybe the Daily News just doesn't have good business reporters.

What I extract from this is that the average family in Alaska has around $7K-$8K in (probably) high interest revolving credit. Unlike at Chez Skipper, a large (maybe even overwhelmingly large) fraction are making minimum or slightly over minimum payments, not paying down to 0 and using the card as a cash equivalent.

The comparison to national doesn't matter absolutely, it's the spread between monthly income and outgo. Alaskans make more but have to spend more, too.

The worry is not so much that people will spend less but that if they are barely covering the smallest carrying charge on their revolving debt, any reduction in income will mean they do not cover all their payments, and the first one left unpaid will be the plastic.

Multiply that by a few scores of millions, and you have banks unable to cover their credit card balances, because they have lent long and borrowed short and may have a hard time rolling their debt.

If these banks are also full of worthless paper (they are), then this split may reveal their heretofore concealed insolvency.

Citi, for example, is very deep in insolvency, but everybody is averting their eyes from the horrible sight.

I still rate the chance of a worldwide financial collapse pretty high.

Maybe that isn't what the Daily News meant, and even if it is, they didn't say it.

But there's a story there.

December 18, 2008 10:48 AM  
Blogger erp said...

Why is it so difficult for some DD'ers, nevermind financial reporters, to separate out those who pay off their credit card charges in full every month and as a result have no debt from those who have lots of unpaid credit card charges aka lotsa debt going back months and even years and which may never be paid?

December 18, 2008 12:49 PM  
Blogger Hey Skipper said...


So to even approach meaningfulness, it would have to be true that the number of cards people have varies directly with their income/wealth.

Well, that is the problem with aggregate numbers. If the US population can be aggregated to a whole bunch of people with roughly two credit cards carrying a total balance of about $3000 (a number I have seen several places and is substantiated by one of the links above), then that seems to have a substantially different meaning than if the average cardholder carries an $11,000 balance.

So, I think it is possible to derive some "meaning", in the sense that if the situation is the former, then we probably don't need to be particularly concerned about the level of household debt.



Maybe the Daily News just doesn't have good business reporters.

Does anyone (present company excluded)?

Barrels of ink have been drained, and pixels wasted, on stories such as this. Yet, at the end of them all, the writers draw conclusions while having demonstrated that not only do they not know what they are talking about, they don't even know they don't know. Heck, in my business, that would be akin to, in addition to missing the runway, being utterly unable to identify one on sight.

What I extract from this is that the average family in Alaska has around $7K-$8K in (probably) high interest revolving credit.

Then you must have special magical extraction powers. It is possible to make an educated guess that Alaskans carry higher credit card balances than the Average American, and that the difference is slightly greater than the proportional difference between US average and Alaskan average income.

That balance is probably -- again, as an educated guess -- explained by the much higher cost of living here than in the lower 48.

According to one of the links in the post, more than 60% of all cardholders always pay their balances in full.

What about the remainder? Occasionally pay interest on a small amount, or always on a large amount? Who knows? I certainly don't, and the reporters, whose responsibility it is to convey the information (after all, that is why I pay for the ADN and The Economist) can't be bothered to figure out the most essential part of the story.

And, while they are at it, avoid double counting: subtracting essential spending from income to determine discretionary spending, then, counting any of that spending conducted via credit card as debt.



... lotsa debt going back months and even years and which may never be paid?

Well, that is an interesting question.

Let's assume a bad case: someone with several credit cards, all of which have been maxed out since time immemorial.

Given even a generous credit limit -- say $10K per card -- for how many years does someone have to be paying the minimum payment at credit card interest rates before the bank comes out ahead even if the card holder were to repudiate the entire balance?

December 19, 2008 9:00 AM  
Blogger Harry Eagar said...

Count on it, the banks have worked that out.

You don't need to take your socks off to figure that if Capital One sends me 300 solicitations for one of their cards per year, they are charging sufficient interest to cover more than the cost of lending long and borrowing short -- as long as they can keep borrowing short.

Which they can't, and sometime in 2009 we will see banks crashing because of this.

NFIB says plastic is the No. 1 source of financing for small businesses. There's most of your 60% who pay down their balances every month.

The majority of householders don't; see remarks about Capital One above.

December 19, 2008 6:29 PM  

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