While the U.S. government can seemingly borrow and spend without limits, the U.S. consumer appears to be nearing the end of its rope. Somehow this always seems to happen at the worst possible time.
The problem, of course, is that U.S. consumer debt has gone parabolic since early 2009. Student loans, auto loans, and credit card debt has all recklessly piled up to dizzying heights. In reality, U.S. consumers have borrowed much more – nearly $13 trillion – than they can ever pay back. Stagnating wages also exacerbate the problem.
Indeed, they’ll need plenty of money set aside to cover unpaid debt. You just wait and see…
Total US household debt (incl. mortgages) – at a new all time high as of the end of Q1 2017
The Three Headed Debt Monster That’s Going to Ravage the Economy
Obviously, bad debt doesn’t just go away. Over time, it metastasizes through the financial system like a wicked three headed monster. At first it is subtle and no one really notices the hideous growth taking place. But then, in the blink of an eye, the monster rampages through the economy leaving destruction in its wake.
The three heads of the consumer debt monster consist of student loans, auto loans, and credit card debt. What makes these debts particularly nasty is that there’s no collateral backing them. Where’s the collateral?
The collateral for student loans is non-recoverable. For it has been dispersed into oversized professor salaries, oversized lecture auditoriums, and oversized sports complexes. Similarly, credit card debt has been run-up purchasing 72-inch flat screen televisions, avocado toast, and combination dinner platters at Applebee’s.
How does a creditor recover the cost of a meal that was consumed 2 years ago? Technically, auto loans have some form of collateral. The cars can always be repossessed. But new cars lose value nearly as fast as fresh tomatoes turn to rot. Presently, record levels of auto loans are backed by cars with negative equity – the debt owed is more than the cars are worth.
The post-crisis car lending lunacy in all its awe-inspiring splendor
What’s more, easy lending over the last 8 years has compelled more and more car buyers to roll their negative equity from prior loan balances into new loans. On top of that, some amiable lenders only verified income on 8 percent of their auto loans. Why bother with such inconveniences when the bad loans are being securitized in packaged debt offerings and sold to pension funds?
The point is, this three-headed debt monster’s been constructed in earnest over the last 8 years. Cheap credit, zealous creditors, and money-pinched consumers desperate to maintain their standard of living have built it up with reckless abandon.
Of course, the chief architects, the policy makers – particularly Bernanke and Yellen – provided the blueprint. Remember, the almighty American consumer was to borrow all the cheap credit being sprinkled about and spend the economy back to optimal growth. Well, the consumers did their part. Yet the lame economic theories fell flat.
Who would you like to feed to the three headed monster for breakfast?