Credit Where Credit Is Due

The good news is Americans are paying off debt and improving their credit scores.  The bad news is Americans are saving that credit for dealing with the next financial storm and they aren't buying as much with it, and that's leading to deflation.

This protracted reluctance on the part of consumers to take out debt and spend it is unmatched in recent memory.

Even after the September 11, 2001 attacks on New York City's World Trade Center, spending rebounded within four months, he said.

The United States will not see a similar upward trend until unemployment abates and home values stabilize, Adams said, adding he doubts the unemployment numbers will drop in the near-term.

In the meantime, U.S. consumers are husbanding their resources instead of spending on items big or small.

Demand for home loans rose the week of August 6, but only by less than 1 percent, even though 30-year loan rates fell to 4.57 percent, the lowest in 20 years of recording keeping by the Mortgage Bankers Association.


Even everyday indulgences are less in favor. Revolving balances on bank-issued credit cards have fallen to 2005 levels, to $716.9 billion in July from a peak of $835.7 billion in October 2008.

"Credit card balances reflect whether consumers are going out to dinner and buying clothes and they are continuing to drop," Adams said. "Consumers do not have confidence and prefer to build up their balance sheets instead of spend."

Despite record low mortgage rates,  banks have ratcheted credit back, consumers have ratcheted spending back, and we're stuck in a deflationary cycle as credit gets taken out of the economy.  Americans are getting worried they'll have to use that card for groceries and gas to make it through a rough patch rather than a new item.

Too many of us are worried about losing what we have, so we're playing it safe.  Even worse, many of us are in a situation where we don't have a choice.