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I’m Dreaming of a Red Christmas?

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It appears American consumers are going to have a red Christmas this year.

Red — as in going deeper into debt.

Shoppers plan to spend less, but borrow more this holiday season.

Black Friday spending fell this year, both in stores and online. It was the first year-over-year Black Friday decline on record.

Online retailers rang up $8.9 billion in sales, down slightly from the $9 billion spent online in 2020. It marked the first time ever year-on-year online sales dropped.

Foot traffic in brick-and-mortar stores dropped by 28.3% compared to prepandemic levels in 2019.

According to the National Retail Federation’s annual survey consumers plan to spend an average of $997.73 this holiday season. That’s down from the prepandemic high of $1,047.83 in 2019. When you factor in inflation, it means Americans will be buying a lot less stuff.

Meanwhile, almost half of American shoppers (45%) plan to use “buy now, pay later” (BNLP) services to spread out their holiday expenses, according to a survey by Cardify.

The use of BNLP services such as Affirm, Afterpay and Klarna has exploded in the last couple of years. These services allow consumers to pay off purchases through installment payments, often interest free. Cardify CEO Derrick Fung said buy now, pay later has rapidly become more mainstream.

“The consumer over the last 12 months has become more compulsive and BNPL products are the result of us being locked up for too long and wanting more instant gratification,” he said.

Buy now, pay later is a convenient way to spread out spending, but there is a dark side. It encourages consumers to spend more. Nearly 46% of those polled said they would spend less if BNPL wasn’t an option.

Mainstream analysts say the dropoff in Black Friday spending is due to shoppers starting earlier due to supply chain concerns. And the rise in BNLP use is simply a matter of convenience. Nothing to see here. In fact, it may well be a sign of consumer confidence.

But both trends could just as well signal consumer distress.

Inflation continues to squeeze American families. October CPI came in at 6.2% on an annualized basis. Everything costs more. Stimulus payments kept American consumers spending earlier this year. Now they’ve turned to debt to finance the spending binge.

Revolving credit, primarily credit card debt, rose by $9.9 billion in September alone, an 11.8% year-on-year increase. Americans now owe over $1.01 trillion in credit card debt. Overall, consumer debt has ballooned to $4.37 trillion. This includes credit card debt, auto loans and student loan debt.

Mainstream reporting tends to spin increasing consumer debt as good news. According to the narrative, Americans believe that the economy is strong and they feel confident enough to borrow money.

Peter Schiff suggested another reason for high levels of borrowing.

Higher prices and an absence of stimulus checks forced Americans to borrow more to buy stuff they can’t afford.”

That trend appears to be accelerating into the holiday season.

Increasing levels of debt could signal consumer optimism, but it could just as easily signal Americans are struggling to make ends meet and they’re turning to credit cards and BNPL to pay their bills.

Through the pandemic, Americans, by and large, kept their credit cards in their wallets and paid down balances. This is typical consumer behavior during an economic downturn. Credit card balances were over $1 trillion when the pandemic began, but fell below that level in 2020. We saw small upticks in credit card balances in February and March of this year as the recovery began, and then a sharp drop in April as stimulus checks rolled out.

But as stimmy money ran out, Americans started borrowing in earnest again in May.

The fact that Americans are still spending will make retailers happy and provide fodder for Joe Biden apologists to claim the economy is booming. But the problem with spending on plastic is credit cards have these inconvenient things called limits. This is not a sustainable economic model.

Furthermore, consumers eventually have to pay the piper. It’s fun buying now. But it’s often a struggle to pay later.

According to a CNBC report, more than 35 million Americans are still paying off credit card debt from last year’s holiday season.

In effect, borrowing takes purchasing power from the future and uses it up now. So, how will Americans pay for future spending? Presumably, they’ll borrow more — until they hit those credit card limits.

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About The Author

Michael Maharrey is the managing editor of the SchiffGold blog, and the host of the Friday Gold Wrap Podcast and It's Your Dime interview series.
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