Do High Credit Card Bills Reflect Optimism? Maybe

Imagine an economy fueled by consumers borrowing to fund living expenses they can’t afford. Actually, you don’t have to imagine it—we are living it. In the fourth quarter of 2022, U.S. credit card balances reached $986 billion, exceeding the pre-pandemic high of $927 billion. With prices rising, it’s inevitable that consumers have to close the budget gaps by either reducing consumption or finding ways to raise more funds—most likely through borrowing. Recent data suggest Americans are turning to plastic to make up the shortfalls, which has become mainstream in our system.

In economics, this is called consumption smoothing, a concept in which consumption remains more or less unchanged or “smooth” despite how choppy real income may be. It is done through balancing saving and borrowing. That is, when consumption costs exceed income, consumers borrow from the future when their income will exceed consumption costs—i.e., they borrow from future savings. But it is not entirely economics that drives consumers to borrow. After all, Average Joe doesn’t read Milton Friedman when he swipes that credit card. There’s psychology involved in the thought process that leads him to borrow from a creditor. Assuming his intention is to pay back what he borrows today, it also must hold true that he believes he has the ability to repay in the future. Effectively, this is optimism because he assumes he will make enough to not only cover his consumption in the future but also have excess savings to repay his current loan. As you can see, the economics of borrowing runs on the psychology of optimism. 

Given that consumers are borrowing on credit cards at a record quarterly rate, it suggests they expect their future income to exceed their future consumption—through higher income, lower prices or a combination of both. Consumers may be verbally expressing their gloomy outlook for the economy, but their behaviors suggest otherwise. Whether their unspoken optimism is driven by their own lived experiences or influences of external opinions is another story. The question is: Can the Federal Reserve curb inflation if this optimism is thriving?