OUT OF MONEY, OUT OF LUCK


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In a study released 23 April, the St. Louis Federal Reserve quantified the damage that the U.S. economic freeze is doing to those whose earnings are in the bottom 25 percent of incomes.
A majority of these people work in the service industry, which pays front-line workers poorly and has been among the economy’s hardest-hit sectors.
The Fed study calculates that short-term spending in the leisure, hospitality, lodging, and restaurant industries will fall 75 percent during the current crisis.
Although the bank expects overall consumer spending to shrink by 3 percent, spending by those in the lowest 20 percent of earners will drop by 5 percent, it said.
While upper-income earners might cut back on discretionary spending, those at the bottom have to slash purchases of some basic necessities more dramatically in order to have enough money for food, rent, and utilities.
“These consumption declines are deeply unequal – hitting those living in areas of highest financial distress the hardest,” the Fed paper noted.
Making the inequality worse: statistics show that the virus epidemic visited higher-income areas earlier than low-income areas.
That delivers a double blow to low-income people. First, customers stopped coming to their hotels and restaurants; then the virus moved into poorer neighborhoods and made them sick.
As a result, an economic recovery is likely to reach the poorest, and their service-industry employers, last.
“Those… service industries aren’t going to participate and that’s one reason to expect that any recovery will be very, very weak,” said Mark Zandi, Moody’s chief economist. “It’s going to be a slog. We’re going to get a bounce when businesses start to reopen, but… I think we’re in economic quicksand for a while.”
Millions Stopped Paying Credit Card Bills
Millions of Americans have relied on credit cards in recent years to pay for doctors’ visits, home repairs, and other routine expenses as prices have soared further and further above wages, which have stagnated for more than two decades.
By the end of last year, consumer debt, excluding mortgages, topped $4 trillion – a record level, well over $10,000 for every person in the U.S.
Typically, if an American has one credit card, he or she has at least three and more likely four.
Now, as millions more are suddenly jobless, they are using credit cards to buy groceries, prescriptions, and other necessities.
Those monthly statements are now showing up in the mail and millions of people lack the money make the minimum monthly payments.
When money is tight, credit cards are often the first payments that people skip. Being late on a credit card does not trigger foreclosure or eviction from your home, repossession of your car, or cancellation of insurance policies.
So banks that have profited richly for years from customers’ bloated credit card balances now will share their customers’ pain.
Many card issuers such as JPMorgan Chase, Capital One, and Discover Financial Services are letting cardholders suspend their payments for a month or longer and a few are lowering or waiving late fees. Some are even erasing a portion of customer’s account balances.
Discover and Synchrony Financial have reported allowing “hundreds of thousands” of cardholders to skip payments. Capital One, with about 120 million U.S. credit cards outstanding, said it has directed about 1 percent of those accounts into formal deferral programs.
Analysts expect card delinquencies and related bank losses to skyrocket later this year.
Stock prices for Discover and Synchrony Financial have shed more than half their value since 1 January.
Seeing card debt rise and the global economy slowing before the world heard of coronavirus, banks have set aside billions of dollars to cover card losses.
“For the next two years or so,” being in the credit card business “will be much less profitable and more risky,” said Brian Riley, director of credit advisory services at Mercator Advisory Group.
TRENDPOST: As noted in the article in this week’s issue, “U.S. POLITICIANS WILL KILL 500,000 MORE WITH LOKDOWN THAN COVID-19”  by Joseph Maxwell, the economic shutdown will be more deadly to the poorest than the virus. 
 

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