Call it a holiday hangover, irrational exuberance, or increasing confidence in the Donald Trump economy, but Americans are getting deeper into debt. In November, U.S. consumer borrowing rose 8.8%, the biggest jump in more than two years, as Americans added $28 billion in auto, credit card, student, and other debt. It is truly staggering to see how much debt has been accumulated in the decade following the Great Recession.
Debts in the categories of auto loans, credit cards, and student loans have topped a confounding $1 trillion, the highest levels on record without adjusting for inflation. Today, total U.S. household debt stands at nearly $13 trillion – and climbing.
Americans are borrowing and spending like it’s 2006 all over again – and they aren’t saving either; the personal savings rate plunged to a 12-year low of 2.4%. Despite the Federal Reserve’s raising interest rates – the latest rate hike is expected to cost consumers roughly $2 billion – consumers continue to take on more obligations.
Are there any signs of a respite from this debt-binge? Hardly. It looks like we’re only getting started.
Though these rudimentary figures are astonishing and frightening, what lays beneath the surface provides Americans a horror show unlike anything they have ever witnessed.
Auto Loan Market Risks Growth
The subprime housing crisis triggered the economic collapse ten years ago. Thanks to public policy, the Federal Reserve, and easy money, millions of Americans took on mortgages they could not afford. Believing that their home equity will perpetually increase, homeowners used their properties as ATMs.
It is true that another housing bubble is forming, but there is another bubble to be fearful of: auto loans.
And it is a similar theme in this arena, too: subprime lending.
Subprime auto loans represent more than $200 billion of the market. Although there are higher odds of defaulting, motorists with inadequate credit scores are experiencing their acceptance rates going up by 20% year-over-year. But it isn’t sunshine and lollipops: the delinquency rate for subprime auto loans is at its highest level since 2010.
In addition, there is an even worse trend flying under the radar: valueless vehicle trade-ins, which some in the auto industry refer to as a “trade-in treadmill.”
According to Edmunds, a car-shopping website, one-third of automobiles traded in last year were worth less than the loans that had been financing them, up from a quarter a decade ago. This means that financing firms and banks are extending riskier investments just to maintain revenues as auto sales decline.
Bloomberg notes that the financial sector could take a big hit when the economy contracts. Since underwater trade-ins suggest that a growing number of borrowers are getting deeper into debt with each car they nab, they won’t be able to afford monthly payments. In 2017, negative equities surged with the typical in-the-red trade-in more than $5,000 underwater.
Some Wall Street titans are reducing their exposure to this market. Wells Fargo, which is the largest holder of subprime auto responsibilities, slashed its holdings, pointing to at least a couple of developments: loan terms are getting longer, and lenders are loosening their standards (the longer it takes to repay the loan, the greater the risk of default).
At least President Donald Trump isn’t initiating a second incarnation of the Cash for Clunkers blunder.
Tap, Insert, Swipe – Rising Credit Card Debt
The average American maintains a credit card balance of $6,375, up 3% from last year. With the Trump boom in full effect, Americans are confident that they can manage their financial duties.
But should we be so convinced about our fiscal skills? A recent study found that up to 31 million Americans with credit card debt think they will never pay off the balance, which means they will leave this world in debt. Another 33% are unsure when they will be debt-free.
Other interesting findings? Forty-three percent of Americans have been carrying a credit card balance for at least two years, the average household with credit card bills pays $1,292 in interest per year and owes $16,883.
Some may suggest this is evidence of strengthening consumer confidence; other money experts argue that there is a finite amount of credit card debt Americans can take on before trouble starts brewing. Yes, delinquency rates are near all-time lows, but CreditCards.com senior industry analyst Matt Schulz still urges pecuniary caution:
“With credit card debt currently at record levels, it’s frightening that so many Americans do not have a plan to get out of the red. Simply put, there’s only so much credit card debt Americans can absorb without it causing real problems.”
Due to the advent of tapping, online shopping being easier than ever, and lenders extending credit at pre-recession levels, Mephistopheles hangs on our shoulder for instant gratification. And it’s getting us into a fiscal crisis.
Global Debt a Bomb Waiting to Explode
In January, Liberty Nation reported that world debt hit a historic level of $233 trillion in 2017. The government debt numbers were astounding, but the amount of obligations in the private sector is overwhelming: $68 trillion in non-financial sector corporate debt, $58 trillion in financial sector corporate commitments, and $40 trillion in household liabilities
As the character from Richard Wagner’s Die Meistersinger Von Nürnberg, Hans Sachs, declares, “Mad, mad, all the world’s mad!” Or, what may be a bit more contemporary, as Howard Beale from Network bellowed, “This is mass madness, you maniacs!”
Every type of American is facing insurmountable debt levels – young and old, man and woman, black and white. From student loans to auto loans to credit cards, consumers are grappling with the unenviable task of servicing their commitments.
As interest rates ascend, the cost of living becomes unbearable, and the economy inevitably recedes, the global debt bomb will eventually explode. Because Washington is ensconced in astronomical liabilities and the Federal Reserve is out of bullets, there is no bailout coming, either for Wall Street or Main Street. At least this time we will take the medicine we need, not kick the can down the road.
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