• It’s official: The United States has been in a recession since December 2007, the National Bureau of Economic Research said yesterday (Monday). Already 12 months into it, this recession is longer than eight of the 10 recessions the U.S. has experienced since World War II, CNNMoney reported. Should it continue past the June 2009, it will be the longest.

• U.S. Federal Reserve Chairman Ben Bernanke said the central bank could buy long-term Treasury securities to help revive the economy. “This approach might influence the yields on these securities, thus helping to spur aggregate demand,” he said in a speech yesterday (Monday) in Austin, Texas, Bloomberg reported.

• A report from JP Morgan Securities (JPM) predicts the U.S. Federal Reserve will lower its benchmark federal funds rate to 0% and hold it there at least until the end of 2009. The current rate is 1.0%, and many analysts predict the Fed will lower it to 0.5% at its December 15-16 meeting, Reuters reported.

• Pilgrim’s Pride Corp. (PPC), the largest U.S. chicken producer, filed for Chapter 11 bankruptcy protection after four consecutive quarters in the red fueled by rising grain costs. The company is the poultry supplier to Wal-Mart Stores, Inc. (WMT) and Kentucky Fried Chicken, a subsidiary of Yum! Brands Inc. (YUM), Bloomberg reported.

• The U.S. credit-card industry could pull back more than $2 trillion of credit lines over the next 18 months due to risk aversion and regulatory changes banking analyst Meredith Whitney said yesterday (Monday). “Already, we have witnessed the entire mortgage market hit a wall, and we believe it will, for the first time ever, show actual shrinkage over the next few months,” she wrote. The credit card market will be 18 months behind the mortgage market and will begin to shrink by mid-2010, Whitney said.

• Light, sweet crude for January delivery yesterday (Monday) fell $5.15, more than 9%, to settle at $49.28 a barrel on the New York Mercantile Exchange. Reports showing declines in both manufacturing activity and construction spending also contributed to the decline.

• Johnson & Johnson (JNJ) said yesterday (Monday) that it would buy cosmetic-product and breast-implant maker Mentor Corp. (MNT) for $1.07 billion. J&J will start a cash tender offer for $31 per share – almost double Mentor’s Friday closing price of $16.15 a share.

Global Investing Roundups, Tuesday, December 2nd, 2008

A look at the actual numbers from the Reserve Bank yesterday tells a slightly different story. Total Australian credit card debt actually grew at 9% in February, from $39.5 billion to $43.25 billion. Interest-bearing debt grew by 9% to $31 billion. Even worse, the average interest rate Australians pay on credit card debt leapt from 17.6% to 19.4%.

Thanks to the rise in rates, credit card interest rates are 20% higher than this time last year. And it means, with current balances, Aussies are paying about $500 million in interest on stuff they already bought. Is it too late to buy into the Visa IPO?

What is so annoying about the credit card headline?

Well, it suggests that Australian credit card debt has actually declined. It hasn’t. It’s just growing less fast. This is like those ridiculous announcements that periodically emanate from the bowels of the U.S. Government about the size of the Federal deficit.

In the months that the deficit grows less fast than the month before, you see headlines like, “Deficit shrinks.” Of course it’s deliberate deception (a lie, if you like). If a tumor grows less fast it doesn’t mean it’s less dangerous. It’s still cancer (nearly all debt is malignant). And growing less fast isn’t really a qualitative improvement.

The goods news for Glenn Stevens is that high interest repayments on credit cards will eat into domestic consumption. The bad news is that the higher rates actually led to lower repayments according to the latest RBA figures. Repayments in February fell by 7.9% from $18.21 billion to $16.71 billion. That was for the month, by the way.

One chart came to mind in light of yesterday’s credit card news. It’s the climb in household interest repayments as a percentage of disposable income.

Not surprisingly, it’s on the rise. Granted, the combined number includes many older homeowners who are willing to carry higher debt loads later in life. But the simple truth is that paying interest on debt is not a good way to accumulate wealth. Never has been. Never will be. Simply not possible to get rich by spending the bank’s money.

Let’s put it this way: unless wages rise (something that would probably cause the Reserve Bank to put up rates again), Australians on the margin of the boom will have to use their credit cards to finance essential consumption, and they will pay dearly to do so. Either that, or they will have to reduce consumption. “If we do not discipline ourselves,” the old saying goes, “life will do it for us.”

Dan Denning
The Daily Reckoning Australia

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