Skyrocketing Consumer Debt & Falling Rates
With home mortgages, the primary collateral for the loan balance is the home itself. In the event of a future default, the lender can file a foreclosure notice and take the property back several months later. With automobile loans, the car dealership or current lender servicing the loan can repossess the car.

Homeowners often refinance their non-deductible consumer debt that generally have shorter terms, much higher interest rates, and no tax benefits most often into newer cash-out refinance mortgage loans that reduce their monthly debt obligations. While this can be wise for many property owners, it may be a bit risky for other property owners if they leverage their homes too much.

With credit cards, lenders don’t have any real collateral to protect their financial interests, which is why the interest rates can easily be double-digits about 10%, 20%, or 30% in annual rates and fees, regardless of any national usury laws that were meant to protect borrowers from being charged “unnecessarily and unfairly high rates and fees” as usury laws were originally designed to do when first drafted.

Zero Hedge has reported that 50% of Americans don’t have access to even $400 cash for an emergency situation. Some tenants pay upwards of 50% to 60% of their income on rent. A past 2017 study by Northwestern Mutual noted the following details in regard to the lack of cash and high credit card balances for upwards of 50% of young and older Americans today:

* 50% of Baby Boomers have basically no retirement savings.

* 50% of Americans (excluding mortgage balances) have outstanding debt balances (credit cards, etc.) of more than $25,000. 

* The average American with debt has credit card balances of $37,000, and an annual income of just $30,000. 

* Over 45% of consumers spend up to 50% of their monthly income on debt repayments that are typically near minimum monthly payments.


Rising Global Debt 


According to a report released by IIF (Institute of International Finance) Global Debt Monitor, debt rose to a whopping $246 trillion in the 1st quarter of 2019. In just the first three months of 2019, global debt increased by a staggering $3 trillion dollar amount. The rate of global debt far outpaced the rate of economic growth in the same first quarter of 2019 as the total debt/GDP (Gross Domestic Product) ratio rose to 320%.

The same IIF Global Debt Monitor report for Q1 2019 noted that the debt by sector as a percentage of GDP as follows:

Households: 59.8%

* Non-financial corporates: 91.4%

* Government: 87.2%

* Financial corporates: 80.8%


Rate Cuts and Negative Yields

As of 2019, there’s reportedly an estimated $13.64 trillion dollars worldwide that generates negative yields or returns for the investors who hold government or corporate bonds. This same $13.64 trillion dollar number represents approximately 25% of all sovereign or corporate bond debt worldwide. 


On July 31, 2019, the Federal Reserve announced that they cut short-term rates 0.25% (a quarter point). Their new target range for its overnight lending rate is now somewhere within the 2% to 2.25% rate range. This is 25 basis points lower than their last Fed meeting decision reached on June 19th. This was the first rate cut since the start of the financial recession (or depression) in almost 11 years ago dating back to December 2008.

It’s fairly likely that the Fed will cut rates one or more times in future 2020 meeting dates. If so, short and long-term borrowing costs may move downward and become more affordable for consumers and homeowners. If this happens, then it may be a boost to the housing and financial markets for so long as the economy stabilizes in other sectors as well such as international trade, consumer spending and the retail sector, government deficit spending levels, and other economic factors or trends.

We shall see what happens in the near future in 2020 and beyond.

* The blog article above is a partial excerpt from my previous article entitled Interest Rate and Home Price Swings in the Realty 411 Magazine linked below (pages 87 - 91):
January 8, 2010

The Credit Crisis' Downward Spiral Continues...........

The ongoing and worsening Credit Crisis continues at a rapidly escalating downward spiraling pace. The various bailout programs offered by governments and Central Banks worldwide have done absolutely nothing to help the everyday citizen on the street.

These bailout programs have only worsened the financial crisis worldwide, and have adversely impacted our once capitalistic ways of life by having more and more centralized government control over our various major industries such as the automobile, airline, and health "care" industries as well as the last remaining firms on Wall Street (both of them).

Most obviously, the banking and mortgage market systems have been dramatically impacted by the nationalizing of both Fannie Mae and Freddie Mac who purchase most residential mortgages nationwide. FHA continues to represent a larger percentage of the national mortgage market although the FHA insurance system (and SBA) themselves are close to being technically insolvent sadly.

The first major financial meltdown of this century was probably the 2000 Nasdaq meltdown. Do you remember when the Nasdaq index hit near 5,000 in March of 2000 just prior to the High Tech Bust? This was followed shortly thereafter by the Telecommunications Meltdown (i.e. Global Crossing, etc.). Few people may remember that the Telecommunications meltdown was actually a bigger financial disaster than the High Tech meltdown as the stock and bond losses were staggering.

The official start of the latest financial crisis officially called "The Credit Crisis" began back in August of 2007. However, major sub-prime lenders such as New Century Mortgage (based in Irvine, CA) and others were shutting down well before this official starting date. This mortgage collapse was also followed by a collapsing structured debt product meltdown.

As I have been saying and writing for years, the largest banks in America are all technically insolvent primarily due to their off balance sheet derivatives investments (Credit Default Swaps, etc.) which they seem to "forget" to calculate in their earnings reports each quarter. Sadly, their current losses may far exceed the entire value of their respective financial institutions (cash, stock value, interest income, etc.). Local credit unions and community banks may be a much safer place to put your money than in the largest banks nationwide.

The Credit Crisis, again, is primarily all about the unwinding of the derivatives markets worldwide which may include structured investment or debt instruments such as Credit Default Swaps (a glorified form of a bet which may be hedged or insured by a third party which is probably a shell entity based in the Caribbean as many of these "insurance companies" actually were shown to be in the past), Collaterized Debt Obligations (or Mortgage Backed Securities pools - a package of real estate mortgages in the hundreds of millions of dollars), Structured Investment Vehicles, or other complicated financial entities which are really only understood by a few Ivy League MBAs.

I personally expect the economy to get much worse in 2010. I hope that I am wrong. The more that I research these financial topics, the more concerned that I get in regard to the worsening financial markets and overall economy. Again, the word "crisis" in Chinese means both "danger" and "opportunity" so we all need to focus on the possible positive aspects of this worsening financial meltdown.

There will be some incredible real estate buying opportunities for literally "cents on the dollar" if you know where to look both in your local regions and well as across our nation. Banks will have to unload their non-performing properties and mortgages for much needed cash in the near term.

Coincidentally, our U.S. Dollar may also be worth "a few cents on the dollar" too as hyperinflation continues to escalate partly due to the U.S. Treasury's full speed printing presses which keep creating dollars "out of thin air". Many banks literally are completely out of cash since so few banks actually keep much of their cash reserves on hand.

In fact, some banks may only keep 1% to 3% of all of their deposits on hand primarily in the form of ATM money as they lend out the bulk of their deposits (real estate, business, auto, and consumer loans) via our highly leveraged Fractional Reserve Banking System at sometimes 10 to 50 plus times their total current deposit balances.

For example, your local bank may have $1 million in total bank balance accounts, but they may leverage those assets ten times (or $10 Million in this example) in the form of business, personal, credit card, or real estate loans to others. In the USA, only 3% of all money is currently in the form of actual hard currency (coins or dollars). The rest of the "money" is actually computerized, digital money.  

Out of adversity, comes opportunity. We either stick our heads in the sand and believe that things will get drastically better in our economy, or we try to focus on the opportunities which may be just around the corner. Happy 2010!!!!!

*** Linked to this same blog is a graph which I created a few months ago to better illustrate my perceptions in regard to what the Credit Crisis is really all about worldwide.


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