Image
Image

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):
October 23, 2008

Hyperinflation, Insufficient Equity Capital, & Worthless Assets

Image
The global financial meltdown continues at an escalating pace. All of these latest "bailout" plans which have passed within the past month are doing nothing to help the average American. In fact, the majority of these plans only help the same Wall Street firms (along with the "Fed")who primarily put us all in this financial mess to begin with many years ago.

The problem that we are faced with here in America is not necessarily a problem with "liquidity". In fact, the Fed and the U.S. Treasury are printing money as fast as they can in order to keep the markets from imploding sooner rather than later. 

Remember, the Fed stopped releasing their M3 data (the broadest measure of all money released in the U.S.) back in March 2006. As a result, we do not know how much new money is released each month. The more money that is released into circulation, the less the value of all of our existing dollars will be in the future. This eventually leads to hyperinflation where our dollars buy significantly less goods and services.

When you typically borrow money, you normally borrow the money as an asset. As an offset, you usually have an equal off-setting liability for that borrowed asset. In today's convoluted financial world, the "Fed" (a private entity), and other Central Banks around the world, are acting as a clearing house for toxic, worthless securities. 

For example, the Fed continues to increase the amount of funds lent to technically insolvent banks and investment banks through their anonymous Term Auction Facilities and the Term Securities Lending Facilities. These anonymous loans to many of the largest financial institutions in the world recently were supposedly as high as $480 BILLION PER DAY. 

As I have written many times in the past, eventually these anonymous loans will have to be paid back, or stocks or bonds will have to be assigned to the "Fed" as a form of an equity consideration for these loans. If and when that happens, the existing stock and bond holders equity and debt values will then be diluted and almost worthless at some point in the near term (if not already).

The Fed initially allowed financial institutions to assign their highest rated AAA paper (usually Mortgage Backed Securities or Collaterized Debt Obligations) as "collateral" for these multi-billion dollar loans. However, the Fed in recent times began to allow financial institutions to assign their BBB (almost junk bond status) paper as "collateral" for cash. 

In addition, the Fed may consider the paper to be valued at 100% of the total dollar amount. What is mind-boggling to me is that much of this debt may only now be saleable in the secondary markets worldwide for as low as 2 to 5 cents on the dollar. 

This financial "house of cards" may eventually cause more financial firms to fail in the near term as well as transfer more ownership of the U.S. financial markets into the hands of less and less companies worldwide. The melting down of the Quadrillion (1,000 Trillion+ Plus) worth of primarily unregulated derivatives (a combination of equity and debt) is what this financial crisis is really all about. 

You may expect our dollar to get weaker as time goes on partly due to the combination of massive government debt and the oversupply of too many dollars in circulation. Also, the lack of true equity and valuable assets for many publicly traded companies worldwide will eventually cause their stock values to plummet even further. I am usually an optimist in regard to life, but I also have been known to be a "realist" after researching this information for too many years.

Comments

Hide Comments (0)       Add a new comment
Archives
tiangle  2019
tiangle  2018
tiangle  2017
tiangle  2014
tiangle  2013
tiangle  2011
tiangle  2010
tiangle  2009
tiangle  2008
tiangle  December (10)
tiangle  November (10)
tiangle  October (8)
dot The Credit Ca...
dot Currency &...
dot Paper Assets ...
dot Hyperinflatio...
dot Bursting Bubb...
dot I Told You So
dot Turn Off The ...
dot The Insolvent...
tiangle  September (8)
tiangle  August (14)
tiangle  July (17)
tiangle  June (18)
tiangle  May (19)
tiangle  April (19)
tiangle  March (19)
tiangle  February (3)