from Birch Gold Group:
Right on the heels of a major market correction in late 2018, and the “pandemic year” crisis in late February 2020, comes the current U.S. economic situation.
In fact, this crisis could end up being recorded in history books thanks mainly to historic inflation and trillions of retirement dollars evaporating from the markets in just 6 months.
But if the “tax no one voted for” weren’t enough for Americans saving their hard-earned dollars for retirement, another reality of the current crisis is beginning to reveal itself…
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Rising consumer debt coincides with plummeting savings
It’s bad enough when people are having their budgets stretched thin by historic inflation. Americans are now spending an additional $250 every month or $3,000 per year for the same goods and services they bought last year. Now, that may not sound like much, depending on your family’s situation. In my mind, that $3,000 per year represents lost opportunities. Not just for saving and investing, either – that’s money they can’t use to pay down existing debts.
What happens when budgets are stretched too far? People often resort to credit cards and loans just to maintain the standard of living they’ve grown accustomed to. “This will get better soon,” they tell themselves, swiping a 22% APR Visa to pay for groceries. “Inflation is transitory, right? I’ll pay this off next month.”
It’s very easy to start kicking your own personal debt repayment plan down the road, month after month (like Congress does with the national debt). That’s just not a sustainable solution…
In the last two years alone, consumer debt has surged past its previous, pre-pandemic peak to over $900 billion.
On the chart below, you can see consumer debt plummet during the height of the pandemic panic (prudent people used their stimulus checks to pay off debt), then slowly reverse and begin to climb again.
But that’s only one part of the challenge facing us these days.
Those who enjoy annual incomes over $150,000 can generally afford to pay off their debts. The problem is, they only represent about 13% of all American adults.
Meanwhile, everyone (affluent or otherwise) are saving less than at any time since the 2008 financial crisis. Right now, today, on average we’re saving only 3.5% of our incomes!
Increasing debt and plummeting savings have a predictable result: an increase in credit delinquencies and defaults in the near future.
In fact, according to Dave Kranzler, who compared the credit and savings situation this year with past economic crises, the outlook isn’t pretty:
The same pattern occurred in 1998/1999 right before the tech bubble collapsed, but it’s not as pronounced because the money supply and outstanding household debt was diminutive relative to the post-tech stock crash period, when Greenspan juiced the money supply and encouraged all flavors of consumer borrowing.
Of course, over the next several months, escalating consumer debt losses will not be unique to Goldman. For point of reference, the overall credit card delinquency rate hit 2.7% in Q1 2020. At the peak in the financial crisis years, the delinquency/charge-off rate, according to Fed statistics, hit a peak of 6.77% outstanding balances in Q2 2009. I believe there’s a good chance it will be much worse this time around. [emphasis added]
For now, the delinquency rate is still just below 2%, but has been steadily rising since March of last year.
Kranzler finished his biting analysis by adding that the next crisis “will not be confined to credit cards.” His prediction rested on an increasing amount of bad debt charge-offs in automotive sales at Carmax. It’s not just one chain of car dealerships struggling, though. At the end of the first quarter of the year, total charge-offs for auto loans at U.S. banks totaled $1.198 billion.
We’ve seen credit crises develop before. We don’t know how this one will end, but we do know with absolute certainty that both inflation (and the Fed’s efforts to control it) are making everything worse…
