Debt Slaves

These are the Countries with the Biggest Debt Slaves, and Americans Are Only in 10th place

Americans have been on a borrowing binge. To buy their favorite cars and trucks, they’ve loaded up on $1.14 trillion in auto loans. Young and not so young Americans are mortgaging their future with student loans that now amount to $1.28 trillion. Credit card and other debts are at $1.12 trillion. And mortgage debt stands at $8.82 trillion. 

So, total household debt was $12.35 trillion, according to the New York Fed’s Household Debt and Credit Report for the third quarter 2016. That’s a massive amount of debt. Many consumers are struggling with it. Student loans are seeing enormous default rates, and repayment rates are far worse than previously disclosed. And “debt slaves” has become a term in the financial vernacular. 

But it isn’t nearly enough debt… 

Neither for the New York Fed whose President William Dudley, in a speech(Evolving Consumer Behavior) a few days ago, practically exhorted households to borrow more against the equity in their homes so that they blow this cash and drive up retail sales: 

“Whatever the timing, a return to a reasonable pattern of home equity extraction would be a positive development for retailers, and would provide a boost to aggregate growth,” he mused, with nostalgic thoughts of 2008.

Evolving Consumer Behavior

January 17, 2017

William C.  Dudley, President and Chief Executive Officer

The second most important asset on the balance sheet of many households is housing equity.  So, in addition to being a source of shelter, housing can be a major form of collateral for borrowing for many households.  In fact, for those households that have collateral available to secure loans, housing equity is by far the most important form of collateral.

What this tells us is that the performance of the housing and mortgage markets are important to the retail business.

DYI:  Don't take the bait!  Never borrow money for basic retail items.  This is exampled by items as bedroom furniture, dishes, clothes, vacations etc. a fast way to the poor house.  Only borrow for a house and very sparingly student loan debt.

The purchase of a car or truck should be acquired by cash - that's right buy a used vehicle.  If you feel absolutely compelled to purchase a new car/truck for reliability issues then go small.  I own two Honda Civics even though I could easily afford top of the line high dollar vehicles.  Pumping out money for status leaves you far less money to save and invest especially in your early years.    

 When home prices are rising and housing equity can easily be converted into cash, we can expect to see relatively high levels of consumption, all else equal.  Conversely, when home prices are flat or declining, or mortgage credit is tight, this will put a damper on retail spending.  Events of the last decade have driven this point home in a very clear way.

Time will tell if there is a renewed appetite, on both lenders’ and borrowers’ parts, to convert housing wealth into consumption.  Perhaps, we will soon see a recovery in cash-out refinancing and in HELOC borrowing as a means for households to expand their consumption.  In this case, the household saving rate will begin to decline.  Or, we may need to wait longer for households to feel confident enough to extract some of their home equity, and for lenders to decide that expanding such lending is safe enough for their balance sheets.  Whatever the timing, a return to a reasonable pattern of home equity extraction would be a positive development for retailers, and would provide a boost to aggregate growth.  In the meantime, consumption growth will largely be determined by income growth, the trajectory of wages and the strength of the labor market.

Second, the household sector’s financial condition is in unusually good shape for this point in the economic cycle.  Household indebtedness is relatively low, debt service burdens relative to household income have fallen to levels not seen since at least the early 1980s.  Moreover, household incomes are rising at a moderate pace, supported by continued job gains and some modest strengthening of wage compensation trends.  If households and lenders again become comfortable with financing consumption with debt in addition to income, this will provide additional support to household spending and to the current economic expansion.  

These are the Countries with the Biggest Debt Slaves, and Americans Are Only in 10th place

DYI:  I found it quite interesting that Russia didn't even make the list.  Russia's household debt to GDP is only 20% .  Their central bank has a policy of positive interest rates flooding their banks with savings as their citizens gain confidence in a hardening currency.  Also the flip side will be a pay down in debt further stabilizing - at least from a monetary perspective - Russia.  Why bring this up?  International bankers are being cutout of the loop as their citizens(142 million) become debt free! Another reason for all of the increase tensions all coming from the Alliance [U.S. U.K. NATO EU] as our economies are moribund in debt. 

DYI