Stimulus Checks Run Out; Americans Whip Out Their Credit Cards

What do you do when that stimulus money runs out? You whip out the credit card.

Consumer debt was up 10% in May, according to the latest data from the Federal Reserve, and we saw a big jump in credit card balances for the first time since February 2020.

Americans collectively now owe $4.28 trillion in consumer debt after a $35.3 billion increase in May.

The Federal Reserve consumer debt figures include credit card debt, student loans and auto loans, but do not factor in mortgage debt

Revolving credit, primarily made up of credit card debt rose by $9.2 billion in May, an 11.4% increase. Americans now owe $974.6 billion in credit card debt.

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. We saw small upticks in credit card balances in February and March but a sharp drop in April as stimulus checks rolled out. The 11-billion-plus increase in May eclipsed anything we’ve seen since the pandemic.

The mainstream media called this good news, spinning credit card spending as a sign the economy is continuing to improve. A MarketWatch article painted a typically rosy picture saying, “Households tend to use more credit when the economy is good and people feel like they have a lot of job security.”

But that’s not the only way to look at increased borrowing. You could conclude that since Americans have run out of stimulus money, they’ve been forced back to borrowing to keep up with ever-increasing prices. In other words, the sudden explosion in credit card spending could reveal consumer stress, not consumer confidence.

WolfStreet took a sarcastic shot at this mainstream narrative.

It’s clear that this one small step for consumers was a giant leap for mankind, the way it sounded in the financial media, because American debt-slaves must forever shoulder usurious interest rates to fund the all-important American consumer spending and to fatten up the banks – according to the consensus opinion of economists polled by Reuters, or whatever.”

Even as credit card debt dropped during the pandemic, nonrevolving credit, primarily made up of auto loans and student loans, continued to expand through last year and into 2021. The growth in nonrevolving debt accelerated in May with a 9.5% increase. Total nonrevolving debt now stands at a record $3.3 trillion.

The Federal Reserve and the US government have built a post-pandemic “economic recovery” on stimulus and debt. It is predicated on consumers spending stimulus money borrowed and handed out by the federal government or running up their own credit cards.  But an economy built on debt isn’t sustainable long-term.

This raises another question: how can the Federal Reserve raise interest rates and tighten monetary policy when the entire economy is built on borrowing? This is precisely why Peter Schiff says the Fed isn’t about to raise rates even if inflation turns out not to be “transitory.”

The reason that they are not going to fight inflation in the future is the same reason they’re not fighting it now — because they can’t do it without collapsing the economy. They can’t do it without crashing the stock market, crashing the housing market and forcing the US government to dramatically cut spending or raise taxes on the middle class, two things that it is completely reluctant to do. So, since the Federal Reserve wants no part of any bitter-tasting medicine, even if ultimately it cures what ails us, they’re not going to fight inflation in the future, they’re not going to fight inflation now, they’re never going to fight inflation.”