It appears the holiday shopping season is being sucked into the massive Debt Black Hole floating through the global economy.
Based on preliminary data, the Christmas shopping season is off to a good start. According to data parsed by Mastercard, approximately 87.3 million Americans shopped online, and 81.7 million visited physical stores.
Black Friday and Cyber Monday sales were up a little over 4 percent this year. That exceeds last year’s 3.4 percent growth.
Mainstream pundits took this as a sign that consumers are still doing well despite negative sentiment. But a deeper dive into the data reveals consumers aren’t doing well at all.
They’re borrowing billions just to pay for Christmas.
A large percentage of those purchases were almost certainly made using traditional credit cards. However, many consumers have run their credit cards to the limit. Revolving debt, primarily reflecting credit card balances, has ballooned to over $1.3 trillion.
In recent months, credit card spending has slowed. This likely reflects growing stress on consumers and the fact that many have run up against their credit card limits.
So, how does somebody provide Christmas for the kiddos when they have no savings and their Visa is maxed out?
They turn to buy-now-pay-later (BNPL) programs.
For the first time, BNPL transactions eclipsed $1 billion on Cyber Monday, making up over 7 percent of total online sales.
On Black Friday, BNPL transactions accounted for $747.5 million in online spending, an 8.9 percent increase.
PayPal reported a 23 percent increase in BNPL sales.
As a Forbes article put it, “Consumers were eager to spend even if they didn’t necessarily have the cash to do so.”
Buy-now-pay-later has its benefits. You can generally pay over the span of several months, and many programs offer loans interest-free if payments are on time. BNPL programs don’t generally require credit checks, so you can use these programs even if your credit cards are maxed out.
Stanford accounting professor Ed deHaan called BNPL “a pretty slick innovation.”
“It is convenient and it’s basically free credit if you pay it off on time.”
However, if you don’t have the money to pay for something now, what makes you think you’ll have it in a month?
Many consumers fall into this trap.
If the customer fails to make timely payments, they get hit with fees and interest charges. A Stanford Business study called it “Buy Now, Pain Later.”
“We examined the changes in the BNPL users’ financial health before and after adoption and compared them to similar non-BNPL users. An analysis of more than 570,000 pairs of BNPL users and non-users revealed that users incurred 4 percent more overdraft charges, 1.1 percent higher credit card interest, and 2.3 percent more credit card late charges than their counterparts.”
Professor deHaan said that the study revealed the average effect of using BNPL is negative, calling the finding “surprising.”
“It’s a relatively small negative number, but likely meaningful for many people who live paycheck-to-paycheck.”
Incentives Matter
The rapid growth of buy-now-pay-later financing underscores an important economic reality – incentives matter.
As the saying goes, "Build it, and they will come."
People want to have stuff, and if they are offered what appears to be an easy way to get it, they will avail themselves of those options.
The reality is that most people struggle to make realistic long-term financial calculations. If credit is available, they’ll use it with little thought about how they’ll pay the bills – especially if it is perceived as “cheap” credit (or, in the case of BNPL, free credit).
This is precisely why governments and central banks push interest rates down during an economic crisis. It incentivizes borrowing and spending.
And it's how we ended up with a massive Debt Black Hole to begin with.
After the 2008 Financial Crisis, the Federal Reserve set rates at zero and left them there for over seven years. Even when the central bank started trying to normalize rates, the effort was short-lived. The Fed got rates to 2.5 percent before the economy got shaky and the stock market crashed. The central bank was already cutting rates before the pandemic. And of course, the Fed drove rates to zero again during the COVID era.
More than a decade of easy money incentivized a lot of borrowing and created the Debt Black Hole that now dominates the economy.
There’s nothing fundamentally wrong with using credit. But you can’t run an economy on Visa and Mastercard.
Credit can mask a failing economy. It enables people to keep spending even as they're being squeezed by price inflation. However, the bills always come due.
Don't be fooled into thinking that people buying Christmas presents proves a "strong" economy. It may well be the last gasp of Americans trying to find some happiness as the Debt Black Hole sucks the economy into it.
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