Why the US Economy is Stuck in an Irreversible Destructive Cycle

from Rogue 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, fuelled 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.

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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.

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