A perfect storm in the making

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by Claudio Grass, Claudio Grass:

The New Year is usually associated with a new beginning, a fresh start, or a “clean slate”. Unfortunately, for millions of Americans, these are wishes that are bound to remain unfulfilled – for them, the New Year has nothing “new” to offer at all: it will only perpetuate all the same burdens, obligations and worries of the past year and of the ones that came before.

One physical, practical manifestation of this (though it is certainly not a unique, or even a rare, example) is the fact that at the start of 2024, U.S. household debt reached a record high of $17.3 trillion, according to data from the Federal Reserve Bank of New York. To most of us, this is probably a shocking and nearly inconceivable amount, and it becomes even more surreal once one also factors in the most recent monetary policy reversal and the subsequent interest rate hikes.

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In fact, the main driver of this increase in overall household debt was the surge of credit card debt, which rose by 16.6% between Q3 2022 and Q3 2023. Generally speaking, contrary to Europeans, American consumers have fully embraced and liberally use their credit cards, almost enthusiastically, even for daily expenses and trivial amounts. However, the current credit card debt record goes way beyond that habitual use, it flies in the face of any and all reasonable corrections, adjustments or assumptions of this kind – in fact, it plainly refutes even the most unfounded theories of mere extravagance and hypotheses of conspicuous consumption.

Instead, it reflects a growing dependence on borrowed funds to maintain basic living standards. Factors like stagnant wages, rising inflation, and an uncertain economic future are forcing families to tap into credit lines; not to indulge themselves, but to simply put food on the table and to make ends meet.

Crucially, at the same time that household debt has been climbing, perhaps unsurprisingly, household savings have been moving lower. This lethal combination now threatens to unleash a storm that could cripple individual households and send tremors through the nation’s and perhaps even the world’s economic core.

This reliance on short-term, high-interest debt creates a dangerous cycle of indebtedness, trapping individuals in a web of escalating fees and compounding anxieties. It represents the start of a very worrying downhill journey that we’ve seen before: households taking on additional and more expensive debt (though vehicles like payday loans) in order to pay their preexisting obligations, then inevitably ending up even deeper in debt and thus borrowing even more and under even worse terms to cover it, and being trapped in this vicious circle until they reach a point of utter desperation and trans-generational debt.

The low savings rate paints an even gloomier picture. With barely enough saved for emergencies, let alone for long-term goals, millions of Americans walk a financial tightrope. Surely most of us are familiar with the phrase “living paycheck to paycheck”, but here we are referring to this in a literal, absolute, practical sense.

To wit, any unexpected expense, big or small, can make or break countless households: a job loss, a medical emergency, a natural disaster, or in some cases, even something as mundane as a burst pipe or a broken window, can render them bankrupt, destitute, or even literally homeless.

However, the impact of this lack of savings doesn’t stop there. It also limits overall economic growth, as investing, the engine of the economy, becomes stifled by fears over future uncertainty, by anxiety over limited resources and ultimately, by a narrow, myopic, counterproductive focus on mere survival, in the immediate and primal sense. This poses a dire threat to enterprise, to job creation, to innovation and to long-term investment, perpetuating a cycle of economic contraction.

In a wider sense, this toxic combination of rising household debt and diminishing household savings inevitably leads to a fatal downward spiral: economically and monetarily, but also socially, politically, psychologically and philosophically. After all, this is the “doom loop” that is built into our current system and this is the logical and inescapable end result of any system built upon and built around any idea as unsound as that of fiat money.

Let us not forget that mere faith, no matter how strong it is, no matter how widespread is it and how strictly enforced it is by any central authority, has never been and never will be a reliable and realistic basis for a sound socioeconomic system – Unlike true, objective, proven, timeless and universally recognized stores of value like physical precious metals.

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