New Debt Report Proves We’re in Uncharted Territory

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from Birch Gold Group:

From Peter Reagan at Birch Gold Group

You don’t need a degree in economics to understand that the economy is driven primarily by consumer spending.

When the pandemic started, that spending slowed, thanks in part to the panicked response by government officials who shut down businesses for weeks or months in 2020. (Remember “Two weeks to stop the spread”?)

But starting in 2021, consumer spending finally started picking up again (along with red-hot inflation). And that’s a big economic force! In fact, consumer spending on everything from gas and groceries to mansions and Maseratis now accounts for 68.4% or more than two-thirds of the nation’s gross national product (GDP).

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The next logical question to ponder is: “What is fueling this spending?” Unfortunately, part of the answer is: rapidly accumulating consumer debt.

Debt-fueled economic growth simply isn’t sustainable. Once consumers are maxed out, that economic expansion turns into a sudden contraction…

Today, we’ll dig into the current state of consumer debt and try to figure out how much more our credit cards can take…

Alarmed economists report record consumer debt over $17 trillion

According to a quarterly report made available by the New York Fed, consumer debt has been piling up rather quickly since 2019, before the pandemic started:

Aggregate household debt balances increased by $148 billion in the first quarter of 2023, a 0.9% rise from 2022Q4. Balances now stand at $17.05 trillion and have increased by $2.9 trillion since the end of 2019, just before the pandemic recession.

You can clearly see the upward trend of consumer debt accumulation, and exactly what types of debt are increasing, on the official chart below:

U.S. consumer debt balance and composition, 2003 to 2023

via Federal Reserve of New York Quarterly Report on Household Debt and Credit

Upon closer examination, it looks as though the debt mountain surged back in 2013. Hmm, I wonder if artificially-low interest rates and quantitative easing had anything to do with it?

In addition to increases in consumer debt, and overall mortgage balance increases of $121 billion, three other increasing debt trends from the report were also notable:

  1. Credit cards aren’t being paid off: “Credit card balances were flat in the first quarter, at $986 billion, bucking the typical trend of balance declines in first quarters.”

As you’d expect, people tend to buy holiday gifts on their credit cards. That’s no surprise. Usually, though, people spend less during the first quarter of the following year, paying down those credit card balances… That didn’t happen this year.

  1. Homeowners drew equity out of their homes, taking on more debt for longer: “Balances on home equity lines of credit (HELOC) increased by $3 billion, the fourth consecutive quarterly increase following a nearly 13 year declining trend.”

This simply doesn’t make sense… why would anyone open a HELOC now that interest rates are twenty times higher than they were a year ago? The only reasonable answer is they’re desperate for cash.

  1. The share of debt delinquency increased overall.

Well, that’s not good news for obvious reasons…

Now, after the COVID-19 pandemic started in 2020, there was a mini mortgage refinance boom as people locked in lower, pandemic-era mortgage rates.

That may have been a smart choice for some people..

Unfortunately, it seems that homeowners were mostly drawing on their home equity to try and lower rates and monthly debt payments:

Fed data shows that about 14 million mortgages were refinanced during the pandemic period starting in March 2020. Some 64% were considered “rate refinances,” or homeowners looking to take advantage of lower borrowing costs. Average savings totaled about $220 per month for those borrowers, according to the New York Fed.

Now, as my colleague Phillip Patrick has mentioned, debt isn’t necessarily a bad thing. Cashing out home equity to spend on consumption items, though? That’s a bad idea for most people…

In a further development, Americans are turning to “by now pay later” (BNPL) loans not for high-ticket consumption items (leisure and travel), but for normal everyday necessities like groceries and gas:

the largest percentage (46%) of consumers have used the payment method for clothing, shoes and accessories, with home furniture and appliances as the next largest category at 34%. Technology and beauty products also came in at 27% and 26%, respectively.

What’s more, 21% of shoppers used the plan for groceries,18% used it for events, and 11% for travel, according to the survey.

Bankrate.com senior industry analyst Ted Rossman broke down the basics of BNPL loans, including the biggest risks.

“Historically, ‘buy now pay later’ has been more for clothes, shoes, electronics, furniture, things like that. It is evolving, though,” he told host Maria Bartiromo. “I’m seeing it used more for services, things like travel and concert tickets. And I think, concerningly, we’re also seeing more of this for everyday purchases. It does worry me when people are financing things like groceries and gas in this manner.

Credit is a financial tool. Like all tools, it’s neither good nor bad.

Using credit to pay down more expensive loans? To fund a valuable home renovation? That might be a great decision that increases your net worth over time.

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