Debt on Track to Destroy The American Middle Class

Economists report the household debt to be at its highest in decades.  Yet, at the same time, we are being told that the economy is doing great. Does anyone see a serious contradiction?

In fact, the current economy only favors the wealthy owing to their flourishing financial assets such as stocks and bonds. Owing to the lack of real assets such as property and commodities, the middle and lower classes are becoming overwhelmed due to the serious consequences of the spending/debt cycle.

American consumers have a collective outstanding household debt of about $13.15 trillion of which nearly $1 trillion is the credit card debt alone, households are truly on a debt binge. These figures should be a wake-up call to all the Americans. The convulsive household debt has surpassed the bubble of 2008 and is still escalating. The economy may not be doing so great, after all.

Compared to 2008, the automobile credit balances have increased to $367 billion whereas the outstanding student loans are around $671 billion. Moreover, 67 percent of household debts belong to consumer mortgages. In 2016, twenty-five percent of all the Americans purchased a new or used vehicle and two-thirds of them are repaying through high-interest, long-term loans.

In fact, the consumer debt has exceeded their income for majority of the Americans.

Consumers have become accustomed using easy credit to maintain a lifestyle unaffordable for them otherwise. If this trend continues, and facts indicate that it will, we will be facing a monumental credit crisis in the near future.

A huge portion of credit card debt is the interest. Credit cards are a convenience and consumers readily pay for the privilege. However, it is necessary for consumers to know how credit card interest actually works.

Take the Smiths, a typical family with $2,000 in credit card debt. The Smiths don’t have a considerable cash reserve and only make a minimum monthly payment of $60.00 at 20 percent interest. The monthly payment against the principal is $26.67 while the interest amount is $33.33. With this payment schedule, the Smiths will pay $4,240 over a period of 15 years.

Mortgages are also a part of the household debt. While outstanding mortgages haven’t reached the bubble of 2008, they have still increased indicating  the possibility of another housing crisis in the not-too-distant future. Moreover, with the rising interest rates, the consumer credit may default. Some families rely on credit cards to meet the basic needs. This is the opposite of economic growth.

The decline in automobile sales is already an indication of the future consumer debt crisis. If lenders continue to provide easy access to credit regardless of its looming default and delinquent potential, retail purchase will face a sharp decline in 2018. This will have serious consequences on the overall economy.

The Federal Reserve and other global lenders are a significant contribution to the problem. They allow printing of trillions of dollars and yens for the lenders to distribute to the borrowing consumers at a high interest, leading to a worldwide inflation. All this printed wealth is merely an illusion yet it is raising the cost of living. Prices are rising at an alamingly faster rate compared to the consumer income. There is no increase in real assets. All this is but a mere mushrooming of debt.

The consequences of federal policy will be inescapable unless reversed and there are no signs of any reversal in near or distant future. At this rate, the consumers will soon face a critical financial bubble. Financial assets, such as stocks and bonds, risk losing substantial value. The wealthy can absorb the losses but the poor and middle class will face financial ruin. Consumers need to seriously consider the need to increase their “real” assets, such as real estate and commodities to prevent a long-term financial nightmare.

The chart below shows how the real assets have curved to an all-time low.

It is high time for the American consumers to wake up and stop believing in the magic of easy credit before it is too late. Their upgraded lifestyle is a bubble of an illusion that will burst soon enough.