Looming Recession Update: Redeeming Gifts For Food

This is truly the biggest indication that we're headed into a severe recession that I've yet seen:

Here's a sign of how shaky the economy has become: Wal-Mart says its shoppers are redeeming their holiday gift cards for basic items — pasta sauce, diapers, laundry detergent — instead of iPods or DVDs.

Merchants had hoped shoppers armed with gift cards would provide a lift after a dismal holiday shopping season — partly because shoppers tend to spend even more than the value of the card. But that didn't seem to happen last month, and retailers are feeling the pain.

On Thursday, the nation's retailers turned in their worst January in almost four decades as high gas and food prices, a slumping housing market, tighter credit and a tougher job market pushed consumers to the edge.

Our economy is so dependent on consumer spending that the simple fact that nobody's buying the new release of Michael Clayton despite the totally cool commentary track is really enough to send the whole nation into a tailspin. The truth is that nobody has saved any money for a while, and the most common places where people have typically been able to gather that money, through home equity loans, are drying up as a consequence of the housing crisis. People could turn to their maxed-out credit cards, but for some insane reason the credit card companies are making that more unlikely:

Hundreds of thousands of Capital One and Bank of America cardholders have been notified in recent months that their interest rates are going up — in some cases to as much as 28% — even though they haven't been missing payments.

...."They need to raise rates because they can't raise fees anymore," [David] Robertson said. "It's politically untenable."

...."The card issuers are moving from a risk-management strategy to a revenue-generating strategy," [Robertson] said. "Credit cards are consistently the most profitable retail banking product," Robertson observed. "The growth is not there anymore. And with a recession coming down the pike, there's no expectation of more spending by consumers. The industry needs to raise prices to keep profits where they need to be."

As Kevin Drum notes, this is just going to make people less likely to use their credit cards, meaning less consumer spending and a bigger problem for the same banks trying to make money off their credit cards. The logic is so short-sighted, and it mirrors the logic that has brought us to this economic meltdown in the first place.