Mailvox: Debt Deflation in Action

A reader notices that the credit card companies are rapidly reducing the amount of credit available to their more conservative cardholders.

My husband and I run a small business and have noticed an unusual practice by credit card companies over the last 4-5 months.

Our business is seasonal, and during our ramp up in from February to April, we usually max out 6 cards on supplies and improvements for the coming season. And then the profits from May and June pay those down, before we start making real profits July-October. We’ve been doing this for over ten years, and typically the result of the max-out and quick pay down has been an increased credit limit. 

This year, as we have started the pay down, each large pay down amount, say $2000 on a $10,000 card for example, has come with a credit limit reduction of 50% – 100% of the amount paid. One card, upon paying it off in whole dropped from $2500 to $350 as the limit. 

We have no personal reasons that our limits in particular would be getting slashed after so many years of increases. So I am wondering if this is a systemic attempt to use debt deflation to slow the rate of inflation without further interest rate increases. 

More generally, if what I’m seeing is systemic, is this a correct understanding of debt deflation? 

This is 100 percent debt deflation. And in some ways, it’s more worrisome than the leadup to the 2008 contraction. Whereas in 2008, there was a dearth of people willing to borrow, now it is apparent that the banks simply can’t afford to offer the credit if there isn’t a sufficient amount of interest to be gained.

Which suggests that the 2024 credit cruch and subsequent financial institution failures will be bigger and more consequential than we witnessed in 2008. It’s even possible that the federal government will not be able to bail out most of the failing institutions.

UPDATE: An SG reader adds another indicator worth noting.

We had a different scenario but still deflationary. Our credit card had a 55-day interest free period which we have never paid interest on in 30+ years. Two months ago, we noticed in the fine print at the back page that it was reducing from 55 days to 44 days. It was hidden away and was only announces on the two previous bills. It had been 55 days for 30+ years.