Economists expected consumer credit to shrink by $4 billion between June and July 2009. Their predictions missed the mark by a long shot.
Instead of $4 billion, consumer credit shrank $21.6 billion in just one month’s time, “the most on records dating to 1943,” according to this article.
Why such a drastic drop in credit?
With job losses mounting and an uncertain economy, many consumers are canceling cards and voluntarily cutting back. Plus, credit is hard to get these days. And banks and credit card companies are reducing available credit limits in an effort to reduce their exposure.
Of course, reduced credit isn’t good news for the economy because consumer spending accounts for “70% of economic activity.” But what’s bad for the economy may actually be good for consumers.
Like a forced diet can help you lose weight, so can a forced “debt diet” force you to refrain from spending money you don’t have.