by Zain Jaffer
Most people these days who keep abreast of the business and political news have probably heard of the large $32T US government deficit that keeps growing daily. They’ve also heard as well that the Fed overnight lending rate went up from just above zero to now around 5.5% in a span of a year, which has now trickled down towards the interest rates of car loans, mortgages, business loans, and supposedly the equity markets indirectly.
However the equity markets seem not to have heard the message, as the NASDAQ in particular is still doing pretty well despite a supposed recession. But at some point, when interest rates for guaranteed risk free US bonds become high enough for investors, and job layoff announcements increase, we may see a move from risk-on stocks and crypto assets, to safer bonds.
Loans from banks are definitely affected. The pre pandemic mortgages for example generally averaged around 3% for borrowers, but are now around 7.5%, which basically jacks up the amount they are paying for their houses by a huge amount.
What is not reported as much however is the fact that many households are now swimming in debt. So it’s not just the US Government that is borrowing more than it earns, and borrowing even more to pay off the borrowings. It appears that many households are also living on credit these days as their COVID pandemic savings have been depleted, likely from the move back to normalcy.
According to August 2023 news reports, US credit card debt has reached a record one trillion dollars.[1] If people paid down their credit card debt as fast as they can because perhaps the expected salary or customer payment would arrive in a few days, there is no problem because the interest does not kick in yet or perhaps if it does, for only a short period.
The cause of why we are reaching more for our plastic is because our savings from the pandemic when the Government handed out money to us has been depleted. According to the Federal Reserve Economic Data (FRED), as of June 2023 the average savings rate of the income we made was around 4.3% from a high of almost 25% in May 2020 during the pandemic when we were cooped up at home.[2]
For various reasons, we have had to spend to get back to normal. The resulting inflation from the excess pandemic money printing, and the high Fed interest rates now, have also increased our spending by virtue of higher inflated prices and higher monthly loan amortizations respectively.
The problem is that America is like a house of cards right now, wallowing in debt. Not just the Government but its citizens. Our economy functioned well with credit when we were paying it back regularly just to offset some delays in receivables, but when we started to max out our cards – both from the Government and the citizen’s perspective, we were all sowing the seeds of disaster.
Imagine how our businesses and economy would function without credit. Not everyone has the cash immediately, especially since savings have dwindled. Thus right now we are all functioning and working because of promises to each other.
For example if you are a small businessman, and you use your credit card to order materials for production, manufacture, then ship out the goods, then get paid in a few weeks to pay back the card, then a small amount of interest paid would be manageable. Take note however that the average credit card interest rate is now around twenty percent this 2023, from around fourteen percent in February 2022 before it spiked up.[3] So these days, it is really imperative that when a credit card is used, it is used sparingly and it should be paid back in full as soon as possible.
For retail and service businesses, before you embark on expansion plans, it is probably best to take note that unless you are making low cost non discretionary items such as food, clothing, and shelter, people’s discretionary budgets are extremely tight. Many households just make enough to come up with payments. Some do not make enough at all and are in big trouble.
Most of us better keep those promises to pay each other back from our debts. If everyone fails to pay their debts and defaults, then no one will lend to each other, and our whole economy will just grind to a crashing halt.
SOURCES