Getting your stories straight

USA Today ran two finance stories today with sharply contradictory messages. On the front page, the headline above the fold reads BANKS GET STINGY ON CREDIT. The story reported is that for the first four months of this year the number of new credit cards issued declined 38% compared with the same four months in 2008. Also, credit limits are slightly lower on the new cards that are issued. The average credit limit of $4594 is 3% lower than last year.

The tone of this story is that the new restraint on the part of credit card issuers is a bad thing. Spending pumps up the economy. Easy access to credit leads to spending. Therefore limiting access to credit delays the economic recovery.

In the Money section of the same paper, there is a related story with a completely different slant. Here the headline is US DEBT SHRINKING AT GLACIAL PACE. Total household debt peaked at $13.9 trillion in the third quarter of 2008, almost doubling since 2007. It has declined to $13.8 trillion during the first quarter of 2009, about a 1% drop.

This story points out that the US has just begun to deleverage. In the mid-80’s, household debt was 65% of disposable income. At the peak in 2007, household debt was 133% of disposable income. The perspective underlying this story is that until a lot more debt is either paid off or written off, consumers will not have the available income to resume spending in a way that will lift the economy.

So which is it? Is more debt good for the economy, or bad for the economy? From my perspective, it is an obvious answer. The economy came crashing down because of excessive debt. People paid way too much for houses they couldn’t afford. Then, to furnish those houses, they maxed out their credit cards. This was followed by tapping home equity lines of credit to pay off credit cards, which were then run up to the limit again.

It was like the financial equivalent of a giant game of musical chairs. Eventually the music stopped. Only in this game, all of the chairs had been pulled away. The good news is that the savings rate has increased from a negative number to 6.9%. This is a sign that people have stopped digging themselves into ever deeper holes of debt. But backfilling those holes will take time. The last thing we need to do is go back onto a credit fueled spending spree. That only starts the digging process all over again.

What was most surprising to me about these two stories is how they could have such different slants on the situation, coming out on the same day in the same paper. Don’t the editors read what the reporters are writing?