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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 27, 2009

Great Britain's Banks Were Hours Away From Collapsing Last Year, U.S. Banks Are In Worse Shape

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"Britain was just three hours away from going bust last year after a secret run on the banks, one of Gordon Brown's (the U.K. Prime Minister) Ministers has revealed", according to The Daily Mail (a well known London publication).

On Friday, October 10th (according to the same article), Britain's entire banking system almost collapsed partly due to a "bank run" for major and minor depositers who attempted to withdraw their funds en masse. The demand for funds was so swift and so massive that all major banks seriously considered shutting down their doors and cancelling all electronic withdrawals that same day in order to keep their bank customers from withdrawing their money. 

The British government almost was forced to nationalize (or socialize) their entire financial banking system in order to protect a potential "domino effect" of bank after bank falling down which, in turn, would cause other banks to collapse as well. 

Sadly, the British government is in the process of nationalizing the once prominent Royal Bank of Scotland (RBS). Rumors abound that Lloyd's of London, HSBC, HBOS, and many other prominent British conglomerants may need to be nationalized soon as well. 

According to many well known and respected financial analysts here in America, Bank of America, Citigroup, and JP Morgan are in potentially the worst financial shape of any financial entities on the planet. For example (according to Martin Weiss, one of my favorite long-time financial writers who I have followed for 20 years), Bank of America and Citibank have potentially $78 trillion in outstanding derivative investments (a hybrid of glorified financial and insurance "bets"). This exposure to risky derivatives is almost ten (10) times the exposure that Lehman Brothers had just prior to their recent bankruptcy. 

Remember, many of these derivative investments now have an actual current market value of just "cents on the dollar" due to the worsening Credit Crisis. The face amount of this $78 trillion in derivatives investments may now only have a current market values of less than 2% to 10% of the original "value". 

As I have written about for years, The Credit Crisis is really all about the unwinding of the complicated derivatives market worldwide estimated to be somewhere in the Quadrillion (1,000 Trillion) to a Quadrillion and a half (1,500 Trillion) range. It is not just a "sub-prime mortgage problem" as portrayed by some in the mainstream media.

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