high debt | Easy Money

In a further signal of the weakening US economy, borrowing amongst US consumers continue to grow which correspondingly sees the total outstanding debt rise to new highs. In addition, and we have discussed this in some detail in our subscription podcasts, there has been a rise also in the delinquency rates across multiple sectors, including auto loans, credit cards and mortgages.

US Household debt now stands at around $13tn, rising around 4.5% in the last 12 months, fueled in part, by credit card debt and also the auto loan sector. Such unsustainable debt is further compounded by stagnant wage growth, zero contract hour jobs, poorly paid service sector employment and the increasing move towards part-time employment opportunities.

This is all the more reason why talk of the Fed raising interest rates is farcical because not only will stagnant wage growth and rising household debt, seriously impact consumer spending, but rising interest rates will further impact economic growth and cause further rises in delinquency rates. This is precisely why interest rates are raised to dampen what might be termed an overheating economy, something we most certainly could not attribute to the current US economy.

There is no doubt that stagnant wage growth is impacting consumer spending but it is also likely to lead to a greater demand for credit which in turn exacerbates the debt and delinquency cycle further. There is no doubt that US household debt will continue to rise and if the Fed was to ever seriously consider raising interest rates it is going to seriously impact those trying to service debt in a stagnant wage growth environment. Delinquency rates continue to rise with e.g. credit card debt delinquencies rising 7.5% year-on-year, and mortgage debt rising 4% year-on-year.

This is a clear example of why QE and ZIRP has been deeply damaging to the US economy. Relatively low-cost borrowing has encouraged this level of indebtedness, coupled with questionable practices concerning the refinancing of existing and delinquent loans.

Given that a service based economy and consumer spending is responsible for nearly three-quarters of the total US GDP, coupled with rising delinquency rates, it is quite clear that this debt cycle is unsustainable and the current $13tn bubble is going to burst, at some point, with disastrous consequences for the US economy.

To put this in further context, total US consumer debt is now 15% higher than it was during the economic crisis of 2008. When we factor in rising costs coupled with stagnant wage growth it will become increasingly difficult for US consumers to met their minimum monthly payment obligations, never mind begin to lower their debt levels.

The sad irony is that the primary economic driver in the US economy, namely consumer spending, coupled with the insane long-term QE/ZIRP policy means that in order for the US economic to avoid implosion, consumers must continue to feed the frenzy at whatever personal cost to themselves, which will ultimately contribute to the economic implosion.

Source: The Sirius Report

The Federal Reserve Bank of New York has released its Household Debt and Credit Report for the first quarter of 2017.

According to the report, household debt has now reached an all-time high. Gains in mortgage debt, auto debt and student debt were all cited. This all-time high now stands at $12.73 trillion and was $149 billion higher than in the fourth quarter of 2016. What stands out here is that it is about $50 billion above the previous peak reached back in the third quarter of 2008 — right before the recession kicked into overdrive.

While the New York Fed showed that aggregate delinquency rates were roughly flat in the first quarter of 2017, some 4.8% of outstanding debt was listed as being in some stage of delinquency. Of that total, $615 billion of debt listed as is delinquent, some $426 billion is listed as seriously delinquent — at least 90 days late or “severely derogatory.”

Debt balances climbed in several areas. Mortgage debt rose 1.7% (up $147 billion) to $8.63 trillion. Balances on home equity lines of credit fell slightly in the first quarter, down $19 billion to $456 billion. Car loans were up 0.9% (up $10 billion) and student loans were up 2.6% (up $34 billion).

It may sound impressive that credit card balances were actually down by 1.9% (by $15 billion) in the first quarter, but there is a seasonal aspect to that component and there are some troubling signs on the internal credit card metrics. Of the $764 billion in credit card balances as a whole, the credit card with 90 or more day delinquency rates deteriorated and they now stand at 7.5%.

It was shown that early delinquency flows have improved since the recession, but there has been a slow deterioration in auto loan performance and a more recent uptick in early delinquency rates on credit card debt.

On student debt, the percentage of student loan balances that transition to serious delinquency has remained high, around 10% and that has been the case over the past five years.

Bankruptcy notations and credit inquires also have to be considered here for the full picture. Some 203,000 consumers had a bankruptcy notation added to their credit reports in the first quarter of 2017, which is 1.7% lower than a year earlier, and the New York Fed called it another record series-low. The number of credit inquiries within the past six months, which the New York Fed calls an indicator of consumer credit demand, declined from the previous quarter to 162 million.