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I saw a news story on TV about this last night. What seemed to really be worrying the talking heads was that rich people were cutting back. In previous years, the poor and middle class cut back, but luxury sales did well, and the economy kept chugging along. This year, stores like Tiffany's and Saks didn't do well. Rich people are now having to choose between the new plasma TV and the Tiffany jewels, while in previous years, they'd buy both.
Part of the downturn in spending by wealthy people may be the "Cheap is the new chic" trend.
Conspicuous consumption may increasingly be viewed as not only not good for the environment--but perhaps physically dangerous as well.
That doesn't explain why the wealthy are suddenly having trouble paying their American Express bills.
For the wealthy, I wonder what fraction of income is either bonus, commission, or dependent on the stack market or other investments, and what fraction is straight salary. As some parts of the wealthy cut back, others will also see their incomes drop and will be obliged to follow suit.
Hey -- on the bright side -- we may finally understand how "trickle down economics" actually works.
Most wealthy depend on the purchasing power of the middle class to support their lifestyles. A weaker middle class means less rich people. Plain and simple.
"Wealthy" is in the eye of the beholder. It's really not very hard to get an Amex card, especially for recent college graduates. Also, in a deflationary period, you "make" money by postponing discretionary purchases--because the price tends to drop with time.
Any way you slice it, IMO the discretionary spending side of the economy is not the place to be. Unfortunately, that's probably where the majority of the jobs in the US are located.
CNBC is reporting that the number of Citibank job layoffs will be in the range of 17,000 to 24,000.
I know, I have an Amex card. (Never use it, though.)
But the article you posted said well-off Amex users were having trouble paying their bills.
I think that the writer defined Amex cardholders as well-off, and then noted that delinquency rates are increasing. The average spent per card is $12,000 per year, but I'm sure that the median would be a lot less. And a lot of the $12,000 number reflects reimbursed business expenses. I suspect that the bulk of the delinquencies are among younger card holders, especially among those still trying to hold on to a house.
In any case, a lot of people who lose their homes are actually going to see an increase in disposable income, assuming that they in most cases move in to less expensive rental units--as long as they still have their jobs, which might be a temporary situation.
From the NYT article:
Hah! $12,000 a year on an AMEX card is chump change for some people.
I happened to have been visiting my older cousin last year, who is now retired from a fairly high-level corporate position in comsumer products marketing. He and his wife are totally addicted to the affluent life style ..... big house, two later model luxury cars, expensive restaurants, exotic vacations, the works.
I was staying overnight to attend a funeral the next day, and the spare room I was given to sleep in was sort of a part-time office and storage room. I couldn't help but notice an AMEX bill on the desk cluttered with other papers. My curiousity got the best of my, and I looked at the bill and was shocked to see a $11,300 balance. Only something like $3,500 was a carried-over balance from the preceeding month, which means that during the billing month my cousin and his wife managed to rack up almost $8,000-worth of charges. In addition to $3,600 to some travel agent, there was about $700 for wine (he's a wind snob, also), almost $900 on restaurants, and all sorts of charges at expensive women's clothing stores.
Now, the thing is that my cousin and his wife also have other credit cards, so lord knows what their total credit card charges were for the month. These people cannot conceive of living any different way, humor me when I discuss the energy situation, and are going to get hit smack between the eyes should the economy fall apart.
Hopefully your cousin doesn't find out you were snooping through his underwear drawer-you will have to spring for a hotel room.
Along those same lines, my wife and I were kind of suprised at the financial situation of our house's previous owners. Having gone into the sale knowing how much they had bought the house for, $180,000, and how much they were selling it for, $340,000, we thought they would be taking home a pretty decent chunk of change. Instead, they had to come to the table with another $40,000 to meet the mortgage and home equity loan balances. On top of that, they left a few recent credit card bills in the house that added up to over $20,000. Somehow, they had burned through $220,000 in a little more than 10 years.
My perception is that Amex is used for more corporate accounts, but I've no data to back that up. If it were true the implications would be interesting.
My wife used her Amex card to fuel a 737 when the pilots had 'forgotten' the company cards some 20 years ago -- another time she racked another $20K in a single shot for a promotion when the company had likewise 'forgotten' that things needed payment ;-)
Speaking of Citibank...
China may block $2B Citi deal - report
You can put the fork in Citi. It is done.
In general, the Chinese are interested in buying US assets (what else are they going to do with all the incredible shrinking dollars they hold?). However, Chinese banks have their own issues with having bailed out failing inefficient Communist industries. My guess is the Chinese leadership is concerned about a troubled Chinese institution taking over a troubled American one. Would that BoA had been so prudent.
I see the China-US economic relationship comparable to the Japan-US relationship in the 1980s. The Japanese started buying up US assets and some feared that eventually they would own the entire country. Then around 1990 the commercial real estate market tanked due to one of Papa Bush's recessions and it brought the Japanese economy down with it. Even 0% interest rates failed to stimulate the Japanese economy. Could the Chinese be falling into a similar trap as the US home real estate market tanks?
The Japanese bought real estate, I think in something of an ostentatious show. When real estate dropped, the Japanese had to sell out at a loss. I think the fundamental problem was arrogance.
The Chinese don't seem to be making the same mistake. They seem largely to be buying financial institutions (e.g. stake in NASDAQ). If our financial industry collapses, as it may, the way real estate collapsed, the Chinese may be sorry they ever bought in. But I think we'll be even sorrier.
A minor correction, I believe.
Reagan cut the support for the dollar in 87. It dropped from 250 yen / $ to 140 yen/$ in 3 months. I couldn't sail out fast enuf. Meanwhile the Japanese people were being told that their market investments were better invested in US real estate, These were the days when Americans thought Japan was going to buy America. Well, lo and behold, they were driving the real estate market up since Japanese don't like to haggle over price. Then Japanese home real estate bubble collapsed and so did their stock market. Sound familiar?
Then when their brokers called them on margin, they had to dump the real estate, at massive loss. Then of course they got killed on the exchange rate. A veritable Greek trajedy. The seeds of your own downfall are sown in your own faults. In this case greed or hubris.
Will the Chinese and Arabs fall for the "Japanese" treatment? Let's see who has learned the lessons of history now.
Dave on MEANDER
It was the other way around, The Japanese stopped supporting the dollar as Trade deficits grew. They dump US treasuries sending the Yen soaring. But when the Japanese market crashed, and exports to the US shrank the started selling the Yen and buying dollars. They been doing this ever since.
This January Atlantic article by James Fallows is an interesting read on the US/China relation. No paywall.
They didn't say that black cards are defaulting.
Anyone can get the regular AMEX cards and they are not even a desirable card to have. AMEX is notoriously bad with merchants as far as excess charges and many will not accept the card.
They also have a lot of credit default exposure.
Visa and MC are just servicers, their only exposure is to a downturn in volume but they are a gold mine for now as they have zero exposure to credit risk.
"Anyone can get the regular AMEX cards and they are not even a desirable card to have."
Might want to be careful the sweeping statements. AmEx is THE choosen card amongst travelers due to their fast dispute resolution processes, highly detailed analysis of expenses on the statements as well as many other features (e.g. insurance, rewards programs) Yes, they are generally more expensive to the merchant on the backend (3% vs 2% for MC/Visa), but as a consumer (not a merchant) you get what you pay for. Since I pay AmEx $100 a year for the card they take care of me not the merchant. AmEx rewards for example in my experience are some of the best points to have - much better than Airlines or even hotel programs.
If your objective is a cheap buy you might get there with Visa and MC. However, since the companies offering MC/Visa accounts are always driving you to carry a balance so they can get more money I would say that the conflict of interest leaves the AmEx as the most user friendly of the cards available. Since they don't plan on you carrying a balance - I'm not referring to the Blue card or the like as these are just a MC/Visa with a higher fee.
It comes down to perspective, but at the end of the day you get what you pay for. A free card is seldom free, just as 0% interest often doesn't work out to 0%...
I have no debt (no house either) but I use AMEX exclusively due to insurance, downloads and due to the exorbitant fee access to the Delta Crown Room. I use it primarily for business and I am not dissatisfied.
I use a business Master Card from Chase that pays me 3% rebates in cash, never had a problem with them in more then 20 years, and don't have to worry about some merchants not taking the card.
I pay the balances in full every month so it doesn't cost me anything.
I get the AMEX offers in the mail all the time, but why change from something that works.
Many years ago I had a dispute with AMEX, and while eventually I prevailed they wasted a lot of my time, so they aren't always as good as you say.
I know how it goes though, the daughters have the AMEX cards and think they are "cool", they also drive the fancy German cars while I ride a 40 year old motorcycle.
Maybe that's why they are always asking for money. LOL.
Half the "wealthy" are probably anything but. They have high salaries, large houses, many luxuries and large and mounting debts. Considering the downturn in real estate, some "wealthy" may even have net negative worth. The real estate bubble led many, rich and poor, to live beyond their means.
Wannabees.
Another, and perhaps more plausable, explanation: In times of a general economic downturn citizens (consumers to TPTB) tend to put off purchases because of expectations of more depression in prices.
But, that would would not answer Leanans question of why 'wealthy' citizens are not paying their credit card bills. Of course many of the wealthy became that way by avoiding paying what they owe...Or, maybe the wealthy are avoiding payment in hopes of a government bailout for 'wealthy card holders that were tricked into paying usererous rates by nefarious credit card companies.' The wealthy could hire a staff of good lawyers and bring a class action suit against some of the card issurers. What a wonderful distraction that would be for the MSM to air. 'Clebrities sue credit card issuers' over loss of their fur coats, Bentleys, and thousands of pairs of shoes!' :)
The important question is what are the really wealthy going to do when it becomes obvious we are collapsing? Are they going to give up their wealth to try to mitigate the crisis and minimize the suffering of their fellow humans? Or will they just try to wall themselves in their compounds and maintain their lifestyles as long as possible. If the latter, which is what I expect, then we are totally screwed.
Dang it, SolarDude! You made me spew tea all over my keyboard.
We, who can afford to sit here typing on computers, are the wealthy, and most of us aren't "giving up our wealth to minimize the suffering of our fellow humans." I don't see how that is going to change in the future. Except the number of "wealthy" will keep shrinking.
I expect we will become more and more like a Third World country, with some very rich, a lot of very poor, and not much of a middle class.
Very perceptive and well said (Para 1)
Don't know if I agree with para 2. IMO+experience, as long as you are willing to do reasonable work there is plenty of opportunity in America. If you are also willing to live somewhat conservatively, you will also accumulate some wealth.
Its likely the Wealthy got caught in the Housing bubble like everyone else. They upsized their homes and poured capital into Hedge funds investing in risky investments. Hedge fund redemptions are up, and a significant number of funds are now blocking investors from widthdrawing. Say for instance your savvy Rich investor that poured millions into hedge funds and now your unable to withdraw your money. Would you continue to spend, or cut back? When the dust settles, some rich folks won't be rich anymore.