Daniel Steinmann
10 July 2009
column
Windhoek — I thank my lucky stars everyday that I am not a resident of the United States. Were I living there for the past couple of years, I would have suffered a deluge of offers, all claiming to make my life easier than what it should be.
In short, the barrage of spending offers created the false impression to a generally ignorant American public, that they can carry on living twenty of thirty times over their real spending power. Poor families bought houses and middle class families refinanced their homes like crazy. Voila! Four years of this and the system came apart at the seams, and then simply imploded. It left the rest of us with serious headaches as we tried to protect our own assets and to escape the worst of the by now famous property bubble.
At that time, towards the end of 2002 when Mr Alan Greenspan started his easy money campaign, many analysts, including yours truly, warned of the inevitable collapse somewhere along the future curve. I think the only thing that caught us unaware was the suddenness with which it arrived, and then the severity of the impact, once the contagion started spreading.
I remember that time well. Despite the fact that I reside in deepest darkest Africa, the Internet has managed to connect us all globally, for better or for worse. I must have received close on a dozen or more offers per day to refinance my property. Fortunately, I did not have any, at least not on US soil.
I am recounting that time because I see the same thing starting to happen again lately, only this time it is with credit cards. I see the beginnings of a credit card bubble, very similar to the pattern that emerged from 2002 through to 2006 when disposable income became a dirty word. I naturally started wondering how it is possible for refinancing companies to offer all these wonderful credit cards deals to a public that is already as bankrupt as hell.
It would be claiming too much to say I understand the mechanics behind refinancing of debt, but I have a strong suspicion, it has much to do with zero or near-zero interest rates. A similar mechanism is used legally when financing very expensive assets like cars (locally) or aircraft (anywhere in the world). It is called retention of residual value.
Now this very fancy expression simply means that one "leases" an asset on a never-never basis. All you have to do is cover the interest, hope for an appreciation in value, and then own and use it. Over time with the effect of inflation, the capital value of the asset grows less, sometimes even becoming insignificant, while in the meantime you enjoy the benefit of having access to it. Then, hopefully, one day when you sell it, the appreciation in value neutralises the residual value for which, technically, you are still liable.
But two things have changed drastically over the past year. First, interest rates are coming down. In the States and Europe they are for all practical purposes nil, and in Japan they are technically zero. Secondly, we find ourselves in the middle of fast-deflating bubbles all around, so capital values, while remaining constant, actually increases as a factor of real income.
Credit card debt is a given and in technical terms, it constitutes a loan without any guarantees. In practise it means there are not assets (movable or stationery) to act as collateral. But if you view the debt itself, as an asset, like a bank does, then the next logical step is to ascribe a residual value to that asset. And as long as it has a residual value, you can keep on the books until doomsday.
Now that the cookie has crumbled, US banks have to hide their appalling credit card stats, saved in no small measure by ZIRP.
This is why I suspect, credit card debt is in the process of being turned, de facto, into an asset on the banks' balance sheet, and that it can sit there whenever, as there is nothing for the owner of this debt to service. In other words, there is absolutely zero expectation for redemption of this debt. This is only possible in a zero interest rate environment. It also relieves the banks from the immediate pressure of another round of capital write-downs. Meanwhile, Tom, Dick and Harry have to live and what better way to keep them as customers during the bad times, than to ensure they have access to more money, all the while hoping for better times. I do not know for sure that the current wave of credit card refinancing or even issuing new cards is driven by American banks. I do know for sure that this new bubble will implode somewhere in the future. I just can't tell you when.
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