Last week the credit card outstanding in the USA reached almost $1 Trillion. And this is all thanks to the savings trap that was created since the stimulus checks began in 2020. Though most economists and governments have been blaming supply-side issues for inflation, the main and more sticky problem is due to the demand side.
Though during lockdown it was essential to support the citizens by way of liquidity and moratoriums. But this also led to large savings by those very citizens a temporary surplus for them. This surplus went into housing, cryptocurrency, stocks and other avenues creating bubbles in each of them.
But since last year when tightening and rate hikes began the same citizens have witnessed a massive drop in investment values and savings. This led them to start paying for the essentials and other expenditures through credit cards. A product that is having highest interest rate and needs no collateral for it.
This creates a higher risk not only for the holders but also for banks and the economy. The default rates that are already rising in this and other loan categories would run a risk of acceleration as unemployment rises in the mid or second half of the year.
Such a scenario is unfolding in various countries at various levels but a financial crisis in the USA due to a savings trap would be bigger and much worst. This would also impact inflation as the dollar value rises to create further depreciation of local currencies throughout the world.