The Fed Has Its Finger On The Button Of A Nuclear Debt Bomb

This article was originally published by Brandon Smith at Alt-Market.com

I hear a lot of talk lately in the alternative media (and even the mainstream media) of the potential for World War III. The general assumption when one hears that term is that “nuclear conflict” is imminent. But a world war does not necessarily have to be fought with nukes. For example, we are perhaps already witnessing the first shots fired in a global economic war as the Trump administration gets ready to implement far-reaching trade tariffs. This action might provide cover (or justification) for destructive attacks on the U.S. fiscal system by China, Japan, Russia, the EU, OPEC nations, etc. The ultimate attack being a dumping of their U.S. debt holdings and the death of the dollar’s world reserve status.

Of course, an economic “world war” between nations would in itself be a smokescreen for and an even more insidious internal war being waged against the global economy by central banks.

There is a longstanding misconception that central banks always manipulate economic conditions to make them appear “healthy” and that the main concern of central bankers is to “defend the golden goose.” This is false. According to the evidence at hand as well as open admissions by central bankers, these private institutions have throughout history also deliberately created financial crises and collapses.

The question I always get from people new to the field of alternative economics is — “Why would central bankers crash a system they benefit from?” This question is drawn from a flawed understanding of the situation.

First, there is the assumption that economic systems are static rather than fluid. In reality, vast sums of wealth can be transferred into and out of any notion on a whim and at the speed of light. The collapse of one economy or multiple economies does not necessarily include the destruction of banker wealth. Even if wealth was their top goal (which it is not), global banks and central banks do not see any particular economy as a “cash cow” or a “golden goose.” From their behavior and tactics in the past, it is more likely that they see national economies as mere storage containers.

Banks can pour their wealth, which they create from thin air, into one or more of these many available containers. They can circulate that wealth within the container for a time and then pour all their wealth out at a moment’s notice. One container is no more valuable to them than any other container, and sometimes sacrificing a container can be beneficial.

The perceived destruction of a national economy can often be exploited as a means to a greater end. Usually this “greater end” means exploiting the crisis to justify centralization of power or the transfer of power from the public into the hands of an elitist class.

I have outlined the history of such transfers on numerous occasions, including the liquidity crisis of 1914 (just after the establishment of the Federal Reserve) leading into World War I and the subsequent hoarding of financial power by banks as well as the creation of the League of Nations.

Or how about the artificial bubble in multiple asset classes created by the Federal Reserve in the 1920s through low interest rates? A bubble which was then burst through the aggressive raising of interest rates at the onset of the Great Depression. This crash coincided with other fabricated economic disasters in Europe and Asia, leading to social despair, the rise of communism and fascism and World War II. This crisis benefited the banking establishment greatly as thousands of smaller independent banks were crushed and a handful of major banks devoured all assets. And, let’s not forget that WWII led to the creation of globalist edifices like the United Nations, the IMF, World Bank, the beginning roots of the European Union, etc.

Every new economic calamity seems to consolidate property and bureaucratic control into the hands of the same class of technocrats. And each calamity is linked to a very important economic factor — massive debt dependency.

So, let’s fast forward to today’s era of burgeoning crisis and how central banks like the Fed are feeding the fire of disaster. I would like to focus most of all on our debt situation to illustrate how the Fed can and will trigger an explosion, a controlled demolition of our financial system. What is our debt situation in the U.S. today?

The Consumer Debt Bomb

Total American household debt skyrocketed beyond $13 trillion at the end of 2017, well beyond historic highs. This is the fifth consecutive year of household debt increases, including credit cards, auto loans, mortgages, student loans, etc. This trend suggests that the “economic recovery” so far has not actually been based on any legitimate wealth creation or resurgence, but an even greater dependence on the same debt that helped cause the crash of 2008. The Fed’s money printing did NOT trickle down to consumers as was originally promised.

While these sectors of consumer debt did not necessarily enjoy the same near-zero rates as banks and corporations did after the crash and the bailout bonanza, their rates are now rising along with the Fed’s rate increases. This is affecting numerous asset classes including housing markets and auto loans.

The cold hard reality is that as the Fed raises interest rates all other areas of the economy come under pressure. The average citizen, with his/her record debt levels, is now subject to the machinations of the central bank through the arbitrary shifting of a single data point like “inflation”.

The Corporate Debt Bomb

This debt bomb is possibly the most subversive and the least understood. I have been warning about how corporate debt and rising interest rates could cause a stock market crash for quite some time, but only recently have mainstream analysts caught up to this realization.

Today, institutions like S&P Global Ratings are showing that at least 37% of 13,000 corporations examined have a debt to earnings ratio of five times, making them “highly leveraged.” This debt level is also even higher than it was in 2007 just before the collapse of Lehman and the beginning of the credit crisis.

The concern goes beyond debt holdings, though. Consider the fact that corporations have been exploiting low interest rates to borrow incredible sums of cash for the sole purpose of purchasing their OWN stocks. Stock buybacks are basically a legal form of market manipulation in which companies buy stocks back from the public and greatly reduce the number of existing stocks circulating in the market, thereby artificially increasing the value of each stock overall and keeping the Dow in the green.

Stock buybacks have been the primary fuel for the longest bull market in history, a bull market so fake that even the mainstream media has been questioning its validity lately. Stock buybacks are completely dependent on cheap debt, and cheap debt is disappearing as the Fed continues raising interest rates. The natural reaction by stock markets will be a crash.

Some people may question whether or not the Fed is actually doing this “deliberately,” or if they are simply ignorant. I would refer them to the recently released Fed minutes from 2012, in which Jerome Powell, now the chairman of the Federal Reserve, talked repeatedly of the negative reaction that would occur within markets once the Fed began cutting its balance sheet holdings and raising interest rates after addicting equities markets to the drug of easy profits.

Jerome Powell himself is recorded as knowing exactly what will happen as interest rates rise, and he is continuing to raise them anyway, while also cutting the Fed balance sheet far faster than was originally telegraphed to the public. How can anyone in their right mind argue that the Fed is not bringing the U.S. economy down deliberately?

The National Debt Bomb

This debt bomb has a much longer fuse that the other two, but in the wake of a potential global trade war (World War III), the question arises as to how long it will take before major U.S. treasury bond holders like China dump their holdings in retaliation.

With Trump refusing to take a stand against the continued raising of the national debt ceiling, and the addition of his $1.5 Trillion infrastructure spending plan, there is little doubt that our national debt will continue to rise. Therefore, foreign investment is essential.

It is important to remember that the Federal Reserve used to be the largest purchaser of U.S. debt or the “buyer of last resort.” Now, the Fed has ended quantitative easing and is cutting its balance sheet swiftly. So, the only buyers left are foreign central banks and investors. My prediction is that the Fed will not step in if a trade war escalates to a treasury bond dump. Or, that they will not step in until it is far too late to stall the resulting crisis.

In Barack Obama’s eight years as president the national debt was essentially doubled. This is a unsustainable rate of debt issuance, even for a nation with the world reserve currency. If we lose foreign investment and the world reserve currency then that debt accumulation will come back to haunt us.

It is important to remember that whatever happens within our economy and the global economy, central banks like the Fed have fully facilitated the bubbles produced as well as the inversions that result. The Fed knows exactly what it is doing. And all other factors, from the Trump trade wars to foreign dumping of U.S. treasuries and the dollar, will be a distraction from the banking elites truly culpable.

Economic warfare can in some cases be just as devastating as nuclear warfare.  It can wipe out entire populations, give rise to tyrants and enslave the minds of individuals through the weaponization of resource scarcity.  Such wars, though less psychologically immediate as our cinematic fears of atomic doom, should be taken very seriously, and the culprits behind them have to be dealt with harshly.

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You can contact Brandon Smith at: brandon@alt-market.com

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This Is Where The Next US Debt Crisis Is Hiding

This report was originally published by Tyler Durden at Zero Hedge

As the Federal Reserve reported most recently two weeks ago, US consumer non-mortgage debt has never been higher: as of December 31, 2017, US households have a record $1.0 trillion of credit card/revolving loans, a record $1.3 trillion of auto loans and a record $1.5 trillion of student loans.

Among these, credit card and auto loans in particular have been experiencing accelerating delinquencies. As a result, finance companies/banks have been increasing bad debt provisioning to build balance sheet reserves due to expectations of rising defaults. The chart below illustrates the highest reported net charge off rates (NCOs) in years.

Net Charge Off Rate for Credit Card Companies

And while all major credit card companies and banks are experiencing increasing credit costs from the trough of late 2015, one would be remiss to spot this at the aggregate level.

As the chart below courtesy of TCW, which illustrates modestly rising net charge offs (i.e. defaults) for the entire U.S. banking universe, NCOs increased from a trough in 4Q15 at 2.9%, which coincidentally was the same quarter the Fed executed its maiden interest rate hike of this cycle, albeit very modestly.

Net Charge-Off Rate on Credit Card Loans, All Commercial Banks

Why the very gradual increase in aggregated NCO, and thus why the lack of economist concerns about the state of the US consumer? Simple: the larger U.S. banks that dominate credit card issuance have focused on prime and super prime consumers post the Great Financial Crisis (GFC), and have enjoyed a prolonged period of low charge off rates concurrent with the Fed’s almost decade long ZIRP.

However, since 2015 the Fed has progressively raised interest rates from ZIRP while NCOs at the larger banks have started to rise, albeit off a low base. NCOs were 3.6% at 3Q17, closing in on a 4% rate, a level that matched the end of previous business expansions in 2000 and 2008.

And here a startling discovery emerges.

As TCW’s Chet Melhotra notes, it is America’s smaller banks – those not in the Top 100 by asset size – that have experienced in just the recent months a surge in charge off deterioration, which at 7.9% is on par with the last financial crisis!  In other words, to find where the next consumer credit crisis hides – and will erupt next – ignore the big banks and focus on the smaller ones.

Net Charge Off Rate on Credit Card Loans, (Banks Not in Top 100 by Assets)

Oddly, this spike in net charge offs among smaller banks has gone largely unnoticed by the general media which has traditionally focused on aggregate numbers and also the largest banks. So, as TCW asks, “is this a precursor to larger banks experiencing much higher loss trends as well or just anomalous?”

Time will tell: there is a possibility that the larger bank NCO rise be just another midcycle phenomenon pulled forward by Fed hikes such as in the mid ‘90s, while the small bank NCOs will stabilize and even revert.

Yet, as TCW further notes, while it is possible that the current NCO increase is benign it is “far from certain in our view, given the current accumulation of overall leverage in the financial system expressed by Bank Credit/GDP at 63%, levels last seen in 2008” as shown below:

U.S. Bank Credit (Loans + Securities)/GDP

The problem is that while the above observation would be easy to dismiss in world of declining, or flat, interest rates, the Fed’s current tightening posture leads to substantial risks of even greater NCOs and defaults as a result of ever higher debt servicing costs, especially if Jay Powell hikes rates 4 more times in 2018 and more in future years.

As TCW points out, rising interest costs and lower credit standards due to stiff competition have resulted in higher credit costs. Even unsecured personal loans have seen rising credit costs, as FinTechs and non-traditional sources of credit have consolidated loans for consumers. Consumers consolidated borrowing but turned around and re-levered with new refinancing capital instead of prudently de-levering.

In response, banks have materially tightened their “credit box” or underwriting standards per the Fed’s SLOO Survey. Recently, nearly 10% of banks reported tightening credit card lending standards, ironically the same level that ended the last two business expansions.

Net % of U.S. Banks Tightening Credit Card Lending Standards

Will this just be another spurious correlation? It remains to be seen, but at the very least it sends a shot across the bow to the consensus thesis of unshackled consumer strength, further amplified by the recent passage of the Tax Cuts and Jobs Act (“TCJA”) aka the Trump Tax cuts.

And while large banks may so far masked the rapid deterioration amid US consumer credit trends, two things are indisputable:

• credit card loans have seen substantial growth over the last few years, and


• credit costs started to rise in 2016.

Most of the increase was initially attributed to “growth math” by card-issuing company executives. This is a seasoning phenomenon that occurs when loan growth rates increase and weaker borrowers default. As newer and weaker front-book pools become a larger share of portfolios, the overall NCO rate rises, and would then be expected to fall after the seasoning effect. Recently lenders have been tightening standards, and high growth pool NCO rates are expected to taper. The problem with the growth math thesis is that now even seasoned back-book vintages are posting rising NCO rates. This is a result of normalization of credit which is less idiosyncratic and more a function of economic factors and consumer stress.

It gets worse.

But first some background: credit card assessed interest is the annualized ratio of total finance charges to the total average daily balances against which the charges were assessed, as defined by the Federal Reserve. In 3Q17 the assessed interest charge jumped to 15%, levels similar to previous business cycle peaks.

Credit Card Assessed Interest Rate vs. Stated APR Rate

This jump may be a result of a maxing out process of the consumer as late fees, cash advance and over-limit fees increase and customers tend to borrow more on their credit cards as a last resort. The higher assessed rate could also encapsulate an incremental mix shift within weaker subprime and private label cards. The spread between the assessed rate and stated average APR rate, which largely reflects Fed rate hikes, is widening. Industry credit card limits of $3.5 trillion are close to the previous 2008 peak while utilization rates are still low.

Credit Card Utilization Rates (LHS) vs. Card Limits in $Trillions (RHS)

But why are consumer credit costs rising in a benign economic environment? Indeed, as shown above, consumer credit costs have been dramatically rising in an economic environment characterized by tepid economic growth over the last two years. Full year 2017 Real YoY GDP growth was +2.3%, accelerating from +1.5% in 2016, while unemployment is at trough levels of 4.1%.

Several potential drivers include:

1. Decelerating Jobs and Weak Wage Growth: Employment growth has decelerated over the last few years, wages have been growing at a subdued 2-2.5% rate, while the costs of rent, healthcare, food and other living items have been rising at a faster rate.

Avg. Hourly Earnings for Production and Non-Supervisory Employees (YoY Change)

As a result, the savings rate has been declining with new spending financed with more credit borrowing. In fact, the personal savings rate has been surprisingly poor this entire cycle, and recently dropped to just shy of all time lows.

Personal savings rate

The CEO of Assurant, Inc. (insurer of mobile devices) recently stated in 2017, in talking about the U.S. consumer: “The reality is half of Americans can’t afford to write a $500 check.” This speaks to the great wealth inequity in the U.S. exacerbated by the Fed’s ZIRP and QE policy.

* * *

2. Consumer Credit and its Share of Real Disposable Income are at Record Highs: Consumer credit is running at $3.8 trillion surpassing its 2008 peak by +45%…

Total Consumer Credit Owned & Securitized ($in Billions)

… and accounting for a record 29% share of consumer real disposable income and 19% of nominal GDP.

Consumer Credit/GDP (LHS) vs. Consumer Credit/ Real Disposable Income (RHS)

To be sure, “drowning in debt” is hardly equivalent to the image of a strong, stable, confident US consumer.

* * *

3. Fully Loaded Financial Obligation Ratio Trending Higher: The U.S. Consumer Financial Obligations ratio has fallen since the GFC, given lower mortgage balances and lower interest rates. However, upon including healthcare costs the Financial Obligation Ratio increases dramatically making it more difficult to service debt.

Financial Obligations Ratio (FOR)

* * *

Meanwhile, as underlying credit trends deteriorate, the Fed is hiking rates, leading to even higher delinquencies and Charge Offs.

The Fed rate hike cycle, begun in 4Q15, has been increasing consumer debt service costs while measured wage growth persists. As a result, NCOs have risen and the Fed continues to increase interest rates at a rapid pace. The rate of change of the Effective Fed Fund’s Rate off a low absolute base is an important determinant of weaker consumer credit metrics, as most consumer debt is keyed off the front end of the yield curve.

Effective Fed Funds Rate vs. U.S. Bank Net Charge Off Rate

Separately, US consumer confidence is currently soaring to levels not seen since close to previous peaks in financial and economic markets. This may be due to the fact that household net worth to disposable income is at an all-time high of 673% or 2.9 standard deviations above its mean since 1951. Worse, as shown in the chart below, the gap between household net worth and the tangible income economy continues to widen to unprecedented levels.

Wealth Economy Has Decoupled From Tangible Economy

As TCW reminds us, the last time we saw this movie the argument was similar to today’s: The equity market was acting as savings for the consumer in the Dot.com Bubble, while the Housing Bubble obliged almost a decade later, abrogating the need for thrift. History hasn’t been kind to this kind of bubble logic.

Today, the discrepancy within aggregate household wealth has never been more skewed. The majority of households don’t have the wherewithal to participate in the Fed’s wealth effect, and as such bear the brunt of financial stress.

However, as noted above, what is especially disconcerting is that this cycle peak in wealth and confidence is being accompanied by a plummeting savings rate.

Consumer Confidence vs. Personal Savings Rate Confidence Outpunting Coverage –> PCE Declines?

This as TCW colorfully puts it, “is akin to consumer confidence out-punting its coverage in football parlance.” Historically, when consumer confidence is robust in the face of a plummeting savings rate, personal consumption expenditures (70% of GDP) typically roll over thereafter, as shown in the chart below. Given the weak savings rate and jump in leverage the consumer seems vulnerable to further interest rate hikes.

Peak Spread Between Real Personal Consumption Expenditures (PCE) YoY Growth & Personal Savings Rate

* * *

So now that we know of a festering locus where American credit deterioration is especially acute – smaller US commercial banks, those not in the Top 100 – and we have observed a substantial deterioration in broader credit trends, the biggest question outstanding is could credit costs accelerate substantially from this point on?

To address this key question, TCW notes that Jobless claims recently printed at a 45-year low of +216K and have been lower than the key level of +300k for the last 43 months. Claims are now 1.6 standard deviations below their historic mean since 1967. This is important as there is a 67% correlation between claims and card NCOs. This means that if claims mean revert at some point, consumer NCOs should increase, possibly dramatically, given tight historical correlations.

Credit Card Net Charge Offs vs. Initial Jobless Claims Strong 67% Correlation 45% of NCO Changes are Explained by Jobless Claims

In conclusion, TCW believes  there is significant potential that consumer NCOs and credit stress may continue to increase, exacerbated by a levered consumer, tightening lending standards, stretched financial obligations ratio, and an aggressive Fed rate hike cycle – but not necessarily in a straight line. In addition, the Fed’s draining of bank reserves as part of its balance sheet reduction plans should make consumer access to liquidity incrementally more difficult over time, as overall monetary aggregates correspondingly decelerate.

At the very least, the asset managers warns that the consensus party lines that “Subprime credit costs are contained” because “This time is different” should be met with skepticism.

We believe the aforementioned adages may not age as well as “I’m tapped out Marv. American Express got a hit man lookin’ for me” as we move through the twilight of this seasoned and levered credit cycle.

For now, however, to find the inflection point, keep an eye on net charge offs at smaller US commercial banks: that’s where the next consumer credit crisis will begin.

Net Charge Off Rate on Credit Card Loans, (Banks Not in Top 100 by Assets)

Consumer Debt Roulette: Debt Is Up $605 Billion BEFORE $682 Billion Is Spent on Christmas

This report was originally published by Daisy Luther at The Organic Prepper

The last time American consumer debt was this high was.. well…NEVER. But now, it seems we are engaged in a high stakes game of consumer debt roulette. And the House is the only one who will win this game.

Last summer, it was reported that people owed more on loans, credit cards, and payment plans than ever in history. The country surpassed the spike that led to the crash of 2008 back in March when debt reached a mind-boggling $12.73 trillion in the first quarter of the year.

Here’s the breakdown, via ZeroHedge:

• Total household indebtedness stood at $12.73 trillion as of March 31, 2017. This increase put overall household debt $50 billion above its previous peak set in the third quarter of 2008 and 14.1 percent above the trough set in the second quarter of 2013.


• Mortgage balances, the largest component of household debt, reached $8.63 trillion as of March 31, a $147 billion uptick from the fourth quarter of 2016.


• Balances on home equity lines of credit fell slightly in the first quarter, down $17 billion to $456 billion.


• Non-housing debt saw mixed changes—an increase of $10 billion in auto loans and $34 billion in student loan balances, and a $15 billion drop in credit card balances.

And we have exceeded the terrible record even more. This year, the debt for American households has grown by 605 billion dollars. THIS YEAR.  That is on top of the insane numbers mentioned earlier.

And it’s causing serious issues.

From extended lines of cash-strapped consumers at New York food pantries to a rise in mental health problems, the latest New York quarterly Fed data paints a dire picture: US household debt has grown by $605 billion in the past 12 months, with $116 billion, or nearly 1 percent, hitting in the latest quarter. Debt is mushrooming everywhere — on mortgages, student loans, auto loans. Credit card debt, meanwhile, has jumped by 3.1 percent in the latest quarter. (source)

You’d think that people would suddenly begin to worry that their debts were outstripping their income, but you’d be wrong.

It hasn’t slowed down Christmas shoppers one bit.

Let’s delve into some crazy statistics about the money spent this past weekend. Don’t let the word “statistics” make your eyes glaze over – you’ll want to read this.

Picture everyone sitting around after turkey dinner in front of the game ignoring each other and shopping on their phones. That’s a pretty accurate picture when you learn that online sales on Thanksgiving day hit $2.9 billion.

Mobile accounted for 61% of all website traffic on Thanksgiving Day, Adobe reported. Shoppers placed 51% more orders on smartphones than last year, according to a Salesforce report emailed to Retail Dive (source)

Isn’t family togetherness wonderful?

Of course, that was only the beginning. At the peak of Black Friday madness, it wasn’t just the brawls over bath towels and toy cars that was jaw-dropping. People spent ONE MILLION DOLLARS A MINUTE shopping at retail outlets and online.

To sum it up, starting out on Thanksgiving Day and continuing through Black Friday all the way to Cyber Monday, shoppers shopped. And they shopped BIG. 70% of Americans shopped over the holiday weekend, spending an average of $335 per person. Let’s break that down a little.

The 174 million Americans who shopped between Thanksgiving Day and Cyber Monday spent an average of $335 per person during that five-day period, the trade group said. The biggest spenders, millennials aged 24 to 35, paid out an average of $419.52 per person. (source)

But it won’t stop there. The eerily accurate National Retail Federation predicts that, despite our record high consumer debt, we’ll still see up to 4% higher spending this year over last year’s insanely high numbers.

The National Retail Federation announced today that it expects holiday retail sales in November and December – excluding automobiles, gasoline and restaurants – to increase between 3.6 and 4 percent for a total of $678.75 billion to $682 billion, up from $655.8 billion last year. (source)

People are planning to spend an average of nearly a thousand dollars PER ADULT – not household. The exact number that one survey shows is $983, which is up dramatically from a more reasonable $417 back in 2000.

(I must be stuck in the year 2000 because I can’t fathom spending much more than that. If that. Here’s some info on how WE do budgets.)

And guess how they plan to pay for it all.

You guessed it already. With more consumer debt.

Credit cards are the most popular form of payment this year, used by 40 percent of shoppers, up from 39 percent last year. That’s tied with debit cards, which will also be used by 40 percent, the same as last year; 18 percent plan to pay with cash and 2 percent will use checks. Of emerging payment methods, PayPal will be used by 36 percent, Apple Pay by 7 percent, Samsung Pay and Google Wallet by 4 percent each and Venmo by 3 percent. (source)

So that debt I mentioned above? The 605 billion dollars extra in American consumer debt this year? That was only year-to-date. We could be adding roughly another 271.5 billion dollars to that debt.

$271,500,000,000.

When we already personally owe $605,000,000,000.

Everyone likes to blame the bankers for the crash in 2008 that sent us spiraling into a recession but in reality, it was caused by consumer debt. No one is forcing us to max out our credit cards or buy houses we can barely afford. But in 2008, banks pushed up the cost of homes and loaned out tons of money to people who really didn’t qualify.

Then, unsurprisingly, they couldn’t make their mortgage payments.

Lending large sums of money into the property market pushes up the price of houses along with the level of personal debt. Interest has to be paid on all the loans that banks make, and with the debt rising quicker than incomes, eventually some people become unable to keep up with repayments. At this point, they stop repaying their loans, and banks find themselves in danger of going bankrupt. (source)

Here’s another explanation of the scenario from 2008.

For almost a decade now, since 2007, we have been living a lie. And that lie is preparing to wreak havoc on our economy….

The lie I am referring to is the idea that the financial crisis of 2008, and subsequent “Great Recession,” were caused by profligate government spending and subsequent public debt. The exact opposite is in fact the case. The crash happened because of dangerously high levels of private debt (a mortgage crisis specifically). And – this is the part we are not supposed to talk about—there is an inverse relation between public and private debt levels.

If the public sector reduces its debt, overall private sector debt goes up. That’s what happened in the years leading up to 2008. Now austerity is making it happening again. And if we don’t do something about it, the results will, inevitably, be another catastrophe. (source)

Clearly, this is unsustainable but people are blithely ignoring it.

Americans are in trouble.

Currently, the issue that could be the head domino that starts the chain reaction of all the others falling is the sub-prime auto loan industry. We could see exactly the same situation we saw in 2008 when people begin defaulting on car loans they should never have gotten.

Analysts have been warning for years that subprime car loans pose a threat to lenders as delinquency rates have edged higher since reaching a post-recession low in 2012. But it wasn’t until last quarter that the least creditworthy borrowers started to show the kinds of late payment profiles that accompanied the start of the financial crisis.

 “We’re seeing an increase in delinquencies across all credit scores, but in the highest credit quality, it’s just a basis point or two,” Chief Economist Amy Crews Cutts said in an email Tuesday. “In deep subprime, the rise is more substantial. What stood out to me was the issuers. Those that have been doing this for a decade or more were showing the ‘better’ performance, while those that were relative newcomers were in the ‘worse’ category.”

…“As soon as lenders (and the investors behind them) get overconfident that they have better models and can make excess profits by disrespecting credit risk, they always get their hats handed to them sooner or later,” Cutts said. “The mortgage market learned this lesson at the expense of the entire global financial system, and it is playing out now in a micro-level, in the ABS market for subprime auto loans.” (source)

But we have the student loan crisis, the mind-blowing amounts of credit card debt (more than a trillion dollars), the ever-growing cost of living and stagnant wages. Add rising healthcare coverage costs that can cost more than all your other living expenses put together (plus a pending 37% increase in 2018) and at some point not too far away, a crash is inevitable.

There is only one way to survive the consumer debt crisis.

You just have to refuse to participate. The solution has to be undertaken personally. You can’t expect the government or the bankers to do what is right – that’s who got us into this mess in the first place.

Resolve now to lower your monthly expenses, get rid of your debt as fast as you can, and learn to live within (or better yet, beneath) your means. There are many variables out of your control, like healthcare costs, inflation, and the job market, but you can absolutely control your spending and your debt level. I have done this myself and I can help you to do the same.(Go here for more information)

You can keep your holiday spending back in the year 2000 and you can resolve not to play consumer debt roulette. You can’t do anything about the rest of the country’s poor spending habits, but you can make yourself more recession-proof.

 

Please feel free to share any information from this article in part or in full, giving credit to the author and including a link to The Organic Prepper and the following bio.

Daisy Luther is the author of The Pantry Primer: A Prepper’s Guide To Whole Food on a Half Price Budget.  Her website, The Organic Prepper, offers information on healthy prepping, including premium nutritional choices, general wellness and non-tech solutions. You can follow Daisy on Facebook and Twitter, and you can email her at daisy@theorganicprepper.ca

U.K. Litigation Cases On Defaulted Consumer Debts Soar Beyond 2008 Levels

Last month, S&P warned that UK lenders could incur £30 billion of losses on their consumer lending portfolios consisting of credit cards, personal and auto loans if interest rates and unemployment rose sharply.  Much like in the U.S., S&P warned that "loose monetary policy, cheap central bank term funding schemes and benign economic conditions" had fueled an "unsustainable" yet massive expansion of consumer credit that will inevitably end badly.  Per The Guardian:

The rapid rise in UK consumer debt to £200bn from car finance, personal loans and credit cards is unsustainable at current growth rates and should raise “red flags” for the major lenders, ratings agency Standard & Poor’s has warned.

 

In detailed analysis of the sector, S&P warned that losses from this form of lending suffered by banks and other financial institutions could be “sharp and very sudden” in an economic downturn and may be exacerbated if the Bank of England increased interest rates.

 

It also warned that it could downgrade banks’ credit ratings if the high growth rate persisted or banks took on too much risk in this sector. But it did not fear any system-wide impact from consumer credit.

 

“Loose monetary policy, cheap central bank term funding schemes and benign economic conditions have supported consumer credit supply and demand,” S&P said.

 

Annual growth rates in UK consumer credit of 10% a year have outpaced household income growth, which is closer to 2%, and become a focus for the Bank which is scrutinising lenders’ approach to the sector.

 

“We believe the double-digit annual growth rate in UK consumer credit would be unsustainable if it continued at the same pace,” S&P said.

Now, new data surrounding the growing number of court filings related to the recovery of consumer debts highlights just how serious the personal leverage problem has become in the UK.  As the FT points out this morning, there have been over 900,000 court judgements on consumer debts in just the first 9 months of 2017, up 34% compared to the same period in 2016, compared to only 827,000 at  the height of the great recession in 2008.

Consumers who refuse to repay their debts are increasingly being taken to court, with litigation at levels last seen in the run-up to the 2007-08 financial crisis.

 

New figures show there were 910,345 county court judgments in the nine months to the end of September. This is an increase of 34 per cent per on the same period in 2016, and compares with 827,000 in the whole of 2008, at the onset of the financial crisis.

 

The rise in court judgments is another indication of the high levels of unsecured debt weighing on British consumers, with Bank of England data showing that borrowing through credit cards, overdrafts and car loans has topped £200bn for the first time since the global crisis.

 

Although UK unemployment is at all-time lows, growth in real incomes and the savings rate have both deteriorated in recent months, suggesting household finances are worsening. Many economists are predicting a slowdown in what has been robust consumer spending.

This should come as little surprise to our readers as we pointed out earlier this summer that the U.K. auto market had seemingly taken a page from U.S. subprime lenders by offering a brand new car, with no money down, to anyone who walks into a dealership with a pulse (see: Undercover Investigation Exposes Deteriorating Auto Lending Standards In Europe; No Job, No Problem) . As the Daily Mail pointed out, their undercover reporters visited a total of 22 dealerships and were repeatedly offered cars of various values with no money down and despite reporters admitting that they had no job and no source of income.

Reporters visited 22 dealerships in England and Scotland, saying they were in their early twenties and either unemployed, on low incomes or trying to buy a car despite having poor credit ratings. Half of the dealerships – including ones selling Audis, Mazdas, Suzukis, Fords, Vauxhalls and Seats – told them they could have a brand new car without paying a penny up front.

 

In each case they were offered Personal Contract Purchase (PCP) deals – a type of car loan that now makes up nine out of ten car sales bought on finance in Britain.

 

These deals offer smaller monthly payments than traditional car loans.

 

A reporter who said he was working part-time on the minimum wage was offered a £15,000 Seat Ibiza without a deposit at a Seat dealership in Manchester.  Another reporter suggested that he had bad credit, but he was offered an £8,600 Vauxhall Corsa in Birmingham.

 

Kevin Barker, 71, found himself £3,500 in debt when he suffered a heart attack six months into a PCP deal. He said a ‘pushy’ Toyota salesman ‘pressured’ him into taking out a 36-month agreement in November 2014 and he was not told of the repercussions if he fell ill or lost his job.

Of course, excessively levered household balance sheets work wonders for gaming GDP growth...that is, right up until the point that interest rates start to rise and those households realize their ability to "afford" their spending binge was nothing more than a temporary blip courtesy of accomodative interest rate policies...the reversal of which will now render many of them bankrupt.

Consumer Credit & The American Conundrum

Authored by Lance Roberts via RealInvestmentAdvice.com,

What to do?  This is not as an innocuous question as one might think. For most American families, who have to balance their living standards to their income, they face this conundrum each and every month.  Today, more than ever, the walk to the end of the driveway has become a dreaded thing as bills loom large in the dark crevices of the mailbox.

What to do?

In a continuation of last week’s discussion on consumer debt, the conundrum exists because there is not enough money to cover the costs of the current living standard.

“The average family of four have few choices available to them as discretionary spending becomes problematic for the bottom 80% of the population whose wage growth hasn’t kept up with the standard of living.”

The burden of debt that was accumulated during the credit boom can’t simply be disposed of. Many can’t sell their house because they can’t qualify to buy a new one and the cost to rent are now higher than current mortgage payments in many places. There is no ability to substantially increase disposable incomes because of deflationary wage pressures, and despite the mainstream spin on recent statistical economic improvements, the burdens on the average American family are increasing.

Nothing brought this to light more than the recent release of the Fed’s Report on “The Economic Well-Being Of U.S. Households.” The overarching problem can be summed up in one chart:

Of course, the recent rise in consumer credit to all-time highs supports that analysis.

Don’t be fooled by the rise in “student loan” debt either. That is NOT representative of a mass hoard of individuals all clamoring into classrooms across the country to garner the benefits of higher education. According to a 2016 Student Loan Hero survey, individuals have other plans for student loan funds which are easy to acquire.

Or as Bloomberg noted in their survey, 1-in-5 American students will use their student loans to pay for expenses such as vacations, dining out and entertainment. To wit:

“Texas A&M graduate Eric Hazard recalls the excitement of student loan refund day.

‘Checks were celebrated across the campus as almost like a bonus for being a college kid. [Students] would go directly to the bank to cash it. I bought electronics for my dorm room and drinks. You know you have to pay it back, but you don’t have a timeline in your mind about what that was going to look like. I just knew it would happen later."”

Of course, the problem comes when the bills come due. Can you spell “d-e-l-i-q-u-e-n-c-y.”

So, therein lies the “Great American Consumer Conundrum.” If 70% of the economy is driven by personal consumption, what happens when consumers simply hit the wall?

There is a limit.

Under more normal circumstances rising consumer credit would mean more consumption. The rise in consumption should, in theory, led to stronger rates of economic growth. I say, in theory, only because the data doesn’t support the claim.

Prior to 1980, when the amount of debt used to support consumption was fairly stagnant, the economy, wages, and personal consumption expanded. However, as I noted previously, that all changed with financial deregulation in the early 80’s which fostered three generations of debt driven excesses.

In the past, if they wanted to expand their consumption beyond the constraint of incomes they turned to credit in order to leverage their consumptive purchasing power. Steadily declining interest rates and lax lending standards put excess credit in the hands of every American.  (Seriously, my dog Jake got a Visa in 1999 with a $5000 credit limit)  This is why during the 80’s and 90’s, as the ease of credit permeated its way through the system, the standard of living seemingly rose in America even while economic growth rate slowed in America along with incomes.

Therefore, as the gap between the “desired” living standard and disposable income expanded it led to a decrease in the personal savings rates and increase in leverage. It is a simple function of math. But the following chart shows why this has likely come to the inevitable conclusion, and why tax cuts and reforms are unlikely to spur higher rates of economic growth.

Beginning in 2009, the gap between the real disposable incomes and the cost of living was no longer able to be filled by credit expansion. In other words, as opposed to prior 1980, the situation is quite different and a harbinger of potentially bigger problems ahead. The consumer is no longer turning to credit to leverage UP consumption – they are turning to credit to maintain their current living needs.

There are currently clear signs of stress emerging from credit. Commercial lending has taken a sharp dive as delinquencies have risen. These are signs of both a late stage economic expansion and a weakening environment.

As incomes remain weak, the real-world inflationary pressures of food, energy, medical and utilities have consumed more of discretionary incomes. This is why dependency on social support systems now comprise a record level of disposable incomes.

“Without government largesse, many individuals would literally be living on the street. The chart above shows all the government “welfare” programs and current levels to date. The black line represents the sum of the underlying sub-components.  While unemployment insurance has tapered off after its sharp rise post the financial crisis, social security, Medicaid, Veterans’ benefits and other social benefits have continued to rise.

Importantly, for the average person, these social benefits are critical to their survival as they make up more than 22% of real disposable personal incomes. With 1/5 of incomes dependent on government transfers, it is not surprising that the economy continues to struggle as recycled tax dollars used for consumption purposes have virtually no impact on the overall economy.”

It is hard to make the claim that the economy is on the verge of recovery with statistics like that. Of course, it is the real reason why after 9-years of “emergency measures” from Central Banks globally, they are still using “emergency measures” despite claiming monetary policy victory.

It isn’t just about the “baby boomers,” either. Millennials are haunted by the same problems, with 40%-ish unemployed, or underemployed, and living back home with parents. In turn, parents are now part of the “sandwich generation” that are caught between taking care of kids and elderly parents. The rise in medical costs and healthcare goes unabated consuming more of their incomes.

Hopefully, the recent upticks in the economic data are more than just the temporary “restocking cycles” we have seen repeatedly over the last 8-years. Hopefully, the current Administration will achieve some part of their legislative agenda to help boost economic growth. Hopefully, international economies can continue their growth trends as they account for 40% of corporate profits. Hopefully, an economic cycle that is already the 3rd longest in history with the lowest annual growth rate, can continue indefinitely into the future.

But that is an awful lot of hoping.

The Coming Debt Reckoning

Authored by MN Gordon via EconomicPrism.com,

American workers, as a whole, are facing a disagreeable disorder.  Their debt burdens are increasing.  Their incomes are stagnating.

There are many reasons why.  In truth, it would take several large volumes to chronicle all of them.  But when you get down to the ‘lick log’ of it all, the disorder stems from decades of technocratic intervention that have stripped away any semblance of a free functioning, self-correcting economy.

The financial system circa 2017, and the economy that supports it, has been stretched to the breaking point.  Shortsighted fiscal and monetary policies have propagated it.  The result is a failing financial order that has become near intolerable for all but the gravy supping political class and their cronies.

Take consumer spending.  This is the primary driver of the U.S. economy.  Yet it requires vast amounts of credit.  In fact, American consumers presently hold $1 trillion in revolving credit.  At the same time, they have nowhere near the income needed to finance these debts, let alone pay them off.

Remember, the flipside of credit is debt.  Obviously, the divergence of increasing debt and stagnating incomes is a condition that cannot go on forever.  But it can go on much longer than any sensible person would consider possible.

Debt Slaves

If you haven’t noticed, the financial services industry is extremely accomplished at compelling people to go whole hog into debt.  Moreover, the entire fiat based financial system, which depends on ever increasing issuances of debt, hinges on it.  Just a slight contraction of credit, like late 2008, and the whole debt repayment structure breaks down.

On an individual basis, there are only so many credit cards that can be maxed out before the shell game ends.  Wolf Richter, of Wolf Street, recently clarified the relationship between the economy and deep consumer debt:

“The US economy is fueled by credit.  Americans turning themselves into debt slaves makes it tick.  Take it away, and what little growth there is – nearly zero in the first quarter – will dissipate into ambient air altogether.  So it’s time to take the pulse of our American debt slaves.

“In a new study, life insurer and financial services provider Northwestern Mutual found that 45 percent of Americans that have debt spend ‘up to half of their monthly income on debt repayment.’  Those are the true debt slaves.

“Excluding mortgage debt, Americans carry an average debt of $37,000.  Of them, 47 percent carry $25,000 or more, and more than 10 percent carry $100,000 or more in debt, excluding mortgage debt.

“Most of them expect to get out of debt before they die, but 14 percent expect to be in debt ‘for the rest of their lives.”’

The Coming Debt Reckoning

Consumers with elevated debt levels are playing a high risk game.  They are one job loss or illness away from losing it all.  Even without such difficult life events, the compounding interest of massive amounts of debt relentlessly pile up like straw upon a camel’s back.  Eventually the breaking point is crossed.

The process may be subtle at first.  Later it’s abrupt.  Here we turn to a brief dialogue from Ernest Hemingway’s 1926 novel, The Sun Also Rises, for a succinct explanation of the process of going broke:

“How did you go bankrupt?” Bill asked.

“Two ways,” Mike said.  “Gradually and then suddenly.”

By our estimation, the gradual trickle toward bankruptcy for many Americans is giving way to the sudden deluge.  On an individual basis, greater amounts of debt may be a temporary solution to a debt problem.  But greater amounts of debt gradually compound to a sudden bankruptcy.

First-quarter GDP, reported last Friday, came in at an annualized rate of just 0.7 percent.  Of this, personal consumption increased just 0.3 percent.

Up and down, in and out, of the economy, consumers are struggling.  Some are attempting to tighten their belts.  Others are at the end of their rope.  Is it any surprise that retailers are shuttering stores at a record clip?

Obviously, the effects of consumer retrenchments will spread out beyond just retail.  Commercial real estate, manufacturing, shipping and transportation, automotive, oil and gas – you name it.  A coordinated supply glut, fueled by excess debt, is upon us.

Make of it what you will.  By our estimation a debt reckoning is coming, and that doesn’t even account for government debt.  What better time than now to get your financial house in order?

Are Debt-Laden American Consumers About To Get Crushed By Higher Interest Rates?

American consumers love debt, wall street loves securitizing that debt and collecting massive fees for selling it and pension funds, with no viable alternative investments courtesy of accommodative Fed policies, love buying that debt for the extra 25bps of yield it provides.  It"s a "win, win, win", right?

Well, until it"s not.  While real median incomes in the U.S. have been stagnant for almost a
decade, real household personal consumption has continued its steady
rise as American"s have simply replaced lost income with new debt.  But,
with household leverage near all-time highs and interest rates on the
rise, we suspect this could all end very badly for the U.S. consumer and those pension funds that were forced to "stretch for yield."

Per a Bloomberg article posted today, the average U.S. household is carrying roughly $133,000 worth of debt, spread between mortgages, credit cards, auto loans, student loans and the newly-popular, crowd-funded, personal loans. 

To be sure, while staggering, this is nothing new as the growth of U.S. consumer debt has basically gone exponential since the early 90"s.

Meanwhile, real median household income has yet to recover to pre-recession 2007 levels.

That said, up until now, the cost of the staggering increases in notional consumer debt outstanding has been offset by lower interest rates.  As a result, historically low rates have have kept the ratio of household debt service to disposable income levels near multi-decade lows. 

But rising rates could change all this in the very near future.  As a quick example, lets assume the median household makes $56,000 per year and gets to take home 75% of that, or roughly $42,000.  As we mentioned above, the average household has roughly $133,000 of debt outstanding.  Assuming the average rate on that debt is 5% (which seems generous but stick with us) would imply $6,650 worth of interest payments per year, or roughly 16% of take home pay.

Unfortunately, a significant portion of consumer debt carries floating interest rates.  Therefore, in the most dire scenario, a 1% increase in rates will translate into an extra $1,330 of annual interest payments, $110 per month, and a roughly 3.2% reduction in discretionary personal income. 

So while the fed-induced treasury bubble has been fun for debt-thirsty Americans willing to take on any amount of leverage so long as they can afford the monthly payments, we suspect the unwind is going to be equally painful.

The State Of The Debt Union: Red Vs Blue States

Politics can be a divisive topic, where issues and events can polarize the population into opposite sides of the spectrum. With this in mind, Lending Club took a look at the state of debt in the United States during this Presidential election race and break down how personal debt compares between red (Republican) and blue (Democrat) states.

So, when we take a look at average personal loan debt and credit card loan debt by state, what do the balance sheets say?

The answer: it’s close!

Below, we’ve compiled a graphic that shows whether red, blue, or battleground states have the most debt along with the top highlights.

Debt Overview Highlights:

Highest average personal loan debt:

Hawaii (Blue state)

It may be out in the middle of the Pacific Ocean, but residents of this vacation destination state are also big debtors, with an average personal loan debt of $11,327. Looks like surf’s not the only thing that’s up in Hawaii.

Lowest average personal loan debt:

New Mexico (Battleground state)

New Mexico was the setting for the hit TV series Breaking Bad, but it certainly looks like it’s not breaking the bank with a nationally-low $5,480 average of personal loan debt.

Highest average credit card debt:

Alaska (Red state)

Although some things may be frozen in Alaska, it looks like credit cards aren’t one of those things; the average credit card debt in the state is $6,778. Alaska residents, check out Lending Club’s personal loan calculator to see if you can consolidate your debt at a lower rate!

Lowest average credit card debt:

Iowa (Red state)

Taking the lead in more than just being the first state primary, Iowa also has good financial momentum when it comes to its average credit card debt of $4,299. It looks like Iowa knows how to caucus and keep their average credit card debt down.