Experts and government officials from the mainstream financial networks keep telling us that the economy is chugging because Americans keep spending money. But it’s clear that borrowing is the only thing keeping this spending spree going.
Meanwhile, the ‘resilient’ American consumer is drowning under a rising tide of debt.
Total household debt increased by $228 billion in the third quarter, reaching a new record of $17.29 trillion. the latest data from the New York Federal Reserve.
Rising credit card balances led the charge, rising 4.7% to a record $1.08 trillion. Year-over-year, credit card debt increased by $154 billion. That was the largest annual increase since 1999.
The bigger problem is the double whammy of rising debt and rising interest rates. The average credit card interest rate surpassed the previous record of 17.87% months ago. The average annual percentage rate (APR) currently stands at 20.72%.
This was reported by the Consumer Financial Protection BureauAmericans paid $130 billion in interest and fees on their credit cards last year. That was the largest amount ever recorded.
While prices skyrocketed last year, Americans said used up their savings to make ends meet. Total savings peaked at $2.1 trillion in August 2021. In June, the San Francisco Fed estimated that total savings had fallen to $190 billion.
In other words, Americans have eaten away $1.9 trillion in savings in just two years.
Then they moved to credit cards.
“People have to deal with this somehow. After using up their savings to buy essentials, they do what’s next: find sources to borrow,” said John Sedunov, professor of finance at Villanova University. ABC news.
According to Market overview“It appears that Americans are relying more on debt to pay for their purchases. They are also increasingly using ‘buy now, pay later’ plans.”
New York Fed economic research advisor Donghoon Lee also attributed the resilience of the American consumer to Visa and Mastercard.
Credit card balances saw a big jump in the third quarter, in line with strong consumer spending and real GDP growth.”
Debt.com chairman Howard Dvorkin shared this CNBC“Consumers maintain and support their lifestyle using credit card debt.”
In other words, the economic growth that President Biden and others keep bragging about is just a result of borrowing. This is not exactly indicative of a healthy economy, nor is it sustainable.
“Consumer spending, which we all know is the basis of GDP, is actually being held up by credit card debt and may not be sustainable,” Mary Hansen, an economics professor at American University, told IPS. ABC news.
There are some signs that debt-driven spending is slowing. After rising by more than 13% in August, revolving credit growth (mainly credit card balances) slowed to 2.9% in September, according to the latest consumer credit data from the Federal Reserve. This could indicate a significant slowdown in spending. That would mean an end to the mythical ‘strong’ economic growth.
Americans don’t just borrow with credit cards. All other debt categories also increased in the third quarter.
Mortgage deposits increased by $126 billion from the previous quarter, reaching $12.14 trillion at the end of September. The large increase in the mortgage balance took place despite a decline in the number of new mortgage applications, as a result of rapidly rising mortgage interest rates.
Despite higher interest rates, more and more Americans appear to be tapping into their home equity to make ends meet. Home equity lines of credit (HELOC) balances increased by $9 billion and now total $349 billion.
Auto loan balances increased by $13 billion and now stand at $1.6 trillion. Auto loans have grown steadily since 2011.
Outstanding student loan debt rose by $30 billion, reaching $1.6 trillion at the end of the third quarter.
There are signs that Americans are beginning to buckle under the pressure of this debt burden. The number of delinquencies increased in all debt categories.
At the end of September, 3% of outstanding debts were in some stage of delinquency. According to the New York Fed, transition default rates have increased for most types of debt, with the exception of student loans and home equity lines of credit.
The report finds a big jump in the number of credit card delinquents, especially in the 30 to 39 age group.
The continued rise in credit card defaults is broadly based across income levels and regions, but is particularly pronounced among millennials and those with car or student loans,” Lee said.
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Missed payments on federal student loans won’t be reported to credit bureaus until the fourth quarter of 2024.
According to the Consumer Financial Protection Bureau, “Nearly a tenth of credit card users are in ‘persistent debt,’ paying more in interest and fees each year than they pay on principal – a pattern that is increasingly difficult to break. .”
The rise in household debt indicates that Americans are struggling to make ends meet as prices rise rapidly, and they are pushing themselves into debt to stay afloat. The stimulus checks are long gone. Savings are running out. The average person has no choice but to borrow.
Debt creates an illusion of prosperity and economic growth. The question is how long can that take?
Rising debt levels are also a problem for the Federal Reserve as they battle persistent price inflation with higher interest rates. The longer interest rates remain high, the harder it will be for people to maintain these enormous debt levels. At some point something has to break.
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