One factor that will make this downturn worse than previous ones is peoples’ current use of credit cards as a substitute for savings accounts to cushion for emergencies.
A generation or two ago, people regularly saved about 8% of their paychecks, on average. This fraction was fairly constant for many decades until about the mid-1990s. Families tended to have a “rainy day” fund for emergencies: medical, car breakdowns, etc., as well as a growing fund for planned vacations, car and house downpayments, and retirement. As a result, people learned to budget, defer gratification, plan their future, and watch proudly as their nest egg grew.
Rampant consumerism encouraged by marketers and lenders changed all that. It was abetted by schools and parents that abandoned teaching the values of thrift, saving, and any other old-fashioned values.
Nowadays, emergencies are met by credit, as are vacations, vehicles, holidays, etc. So as deleveraging hits our big financial institutions with such pain, the same process will confront individuals now deeply in debt.
The ratcheting up of CC interest rates for missed payments, or the yanking of allowable limits is the whack upside the head many people need. Its going to hurt, but its time to sober up.
