Economic data don’t point to boom times just yet
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By contrast, that ratio of household debt to economic output was 70 percent in 2000. To get back to that level, Americans would need to pay down $3.4 trillion in debt
And it isn’t like the 2000 level was one of great consumer discipline. The economy needs to improve in several ways to be approaching a state that could be called a healthy economy. The 2 biggest, in my mind are 1) decreasing debt (consumer and government) and 2) increasing jobs. My next most important would probably be increasing the number of “good” jobs. Many other data points are important, such as: decreasing income inequality; increasing the age at retirement (because of all the systemic problems caused by extremely long retirements financed not by savings but taxes on existing workers); low inflation (luckily that is continuing to look good); value added economic activity (real GDP); decrease in the cost of the health care system as a % of GDP; decrease in financial leverage; economic strength worldwide (economic weakness of Japan, Europe… can severely hamper economic success in the USA). I do not see a bubble hyped economy as a healthy economy – even if lots of measures look good.
Related: Americans are Drowning in Debt – Dollar Decline Due to Government Debt or Total Debt? – Financial Illiteracy Credit Trap – Consumer Debt Down Over $100 Billion So Far in 2009 (Nov 2009)
Credit problems create a vicious cycle. Credit card interest rates are increased, fees are onerous and even applying for jobs is negatively affected (many employers look at credit reports as one factor in the hiring process), insurance companies look at them too and can offer higher rates. Employers and insurers have the belief that bad credit is an indication of other risks they don’t want to take on. Once into the cycle there are challenges to deal with. I must admit I think it is silly to look at credit for most jobs. But a significant number of organizations do so that is an issue someone that gets themselves in this trouble has to deal with.
I think the best way to deal with this problem is to build a virtuous cycle of savings instead. We tend to focus on how to cope with a bad situation instead of how to take sensible actions to avoid getting in the bad situation. In general we spend far too much money and take on too much debt – we live beyond our means and fail to save. Then we have a perfectly predictable temporary hit to our financial situation and a vicious cycle begins.
If we just acted more responsibly when times were good we would have plenty of room to absorb a temporary financial hit without the negative cycle starting. The time to best manage this cycle is before you find yourself in it. Avoiding it is far better than trying to get out of it.
Build up an emergency fund. Don’t borrow using credit cards – or any form of consumer debt (borrowing for education, a car or a house, I think, are ok). Save up your money until you can afford what you want to purchase. Don’t buy stuff just to buy stuff.
Re: The Vicious Circle of Poor Credit
Related: Real Free Credit Report – In the USA 43% Have Less Than $10,000 in Retirement Savings – Financial Planning Made Easy
Welcome to the False Recovery by Eric Janszen
Companies planning for sudden and relatively near-term growth should reshape their strategies to make the best of economic flatness.
He makes a decent point for companies, but the he flips back and forth between the need to save more (because we are buried in debt) and the need to spend more (because we need to grow the economy right now). And while I wouldn’t stake my life on it I wouldn’t be surprised that we have a strong economic rebound (it is also perfectly conceivable we have a next to no growth or even fall into a recession). But it seems to me the return to bubble thinking and spending beyond our means is making a strong comeback.
Another ok, point but we have hardly paying off anything of the previous living beyond our means. It would take decades at this rate.
So the problem is the saving are not actually resulting in increased ability to spend (first point above) – which is bad he says, because it means their won’t be more spending (because people won’t have the ability to spend). Then he says when banks lend the consumers money they will spend and the saving rate will go down (which is bad – though he doesn’t seem to really want more savings (because that means business won’t get increased sales).
The conventional wisdom likes to point out the long term problem of low savings rate but then quickly point out we need more spending or the economy will slow. Yes, when you have an economy that is living beyond its means if you want to address the long term consequences of that it means you have to live within your means. It isn’t tricky. We need to save more. If that means the economy is slower compared to when we lived beyond our means that is what it takes. The alternative is just to live beyond your means for longer and dig yourself deeper into debt.
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With the dollar declining sharply, many are focused on the issue now. And the most common culprit for blame seems to be the federal debt. While I agree the dollar is likely to fall, the deficit doesn’t seem like the main reason, to me. The federal debt is large and growing quickly, which is a problem. But still the USA federal debt to GDP is lower than the OECD average. Even with a few more years of crazy federal debt growth the USA will still be below that average.
Japan has by far the highest level of government debt in the OECD. The Yen is not collapsing. The debt is a factor but the lack of saving (USA consuming more than it produces) seems the biggest problem to me. China not only does not have large government debt it has large amounts of personal savings. People have been living far within their means in Japan and China (only by government intervention, due to desires to not have the currency appreciate has that appreciation been slowed).
Thankfully we have been increasing savings a bit recently but it is a drop in the bucket so far (Consumer Debt Down Over $100 Billion So Far in 2009). It will have to increase in size and continue for years to begin to address the problems in a significant way.
Related: The USA Economy Needs to Reduce Personal and Government Debt (March 2009) – The Truth Behind China’s Currency Peg – Who Will Buy All the USA’s Debt?
The delinquency rate for mortgage loans rose to 9.94% of all loans outstanding at the end of the third quarter, up 108 basis points from the second quarter of 2009, and up 265 basis points from one year ago, according to the Mortgage Bankers Association’s (MBA) National Delinquency Survey. The delinquency rate breaks the record set last quarter (since 1972).
The delinquency rate includes loans that are at least one payment past due but does not include loans somewhere in the process of foreclosure. The percentage of loans in the foreclosure process at the end of the third quarter was 4.47%, an increase of 17 basis points from the second quarter of 2009 and 150 basis points from one year ago. The combined percentage of loans in foreclosure or at least one payment past due was 14.4% on a non-seasonally adjusted basis, the highest ever recorded in the MBA delinquency survey.
The percentages of loans 90 days or more past due, loans in foreclosure, and foreclosures started all set new record highs. The percentage of loans 30 days past due is still below the record set in the second quarter of 1985.
“Despite the recession ending in mid-summer, the decline in mortgage performance continues. Job losses continue to increase and drive up delinquencies… Over the last year, we have seen the ranks of the unemployed increase by about 5.5 million people, increasing the number of seriously delinquent loans by almost 2 million loans,” said Jay Brinkmann, MBA’s Chief Economist.
“The performance of prime adjustable rate loans, which include pay-option ARMs in the MBA survey, continue to deteriorate with the foreclosure rate on those loans for the first time exceeding the rate for subprime fixed-rate loans. In contrast, both subprime fixed-rate and subprime adjustable rate loans saw decreases in foreclosures.”
This continues the bad news on housing. Though home sales have been picking up, the underlying strength of the housing market remains questionable. Without jobs increasing it is very difficult for the real estate market to recover.
Related: Nearly 10% of Mortgages Delinquent or in Foreclosure (Dec 2008) – Loan Default Rates Increased Dramatically in the 2nd Quarter – Another Wave of Foreclosures Loom (July 2009) – Homes Entering Foreclosure at Record (Sep 2007)
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The credit card delinquency rate (borrowers 90 days or more delinquent on one or more of their credit cards) dropped to 1.10% percent in the third quarter of 2009, down 6 basis points from the previous quarter. Year over year, credit card delinquencies remained essentially flat from 1.09% in the third quarter of 2008.
Credit card delinquency was highest in Nevada (1.98%), Florida (1.47%) and Arizona (1.35%). Credit card delinquency rates were lowest in North Dakota (0.66%), South Dakota (0.70%) and Alaska (0.73%).
Average credit card borrower debt decreased to $5,612 from the previous quarter’s $5,719, and $5,710 for the third quarter of 2008.
“At end of the 2001 recession, the national bankcard delinquency rate had increased to a high of 1.69% as that recession came to a close (in November of 2001),” said Ezra Becker, with Transunion.
The slight declines in credit card debt are an encouraging sign that more people are taking the right action to eliminate their credit card debt.
Related: USA Consumers Paying Down Debt – Consumer Debt Down Over $100 Billion So Far in 2009 – Families Should not Finance Everyday Purchases on Credit – Some Movement on Regulating Credit Cards Companies
One of the few good recent results of the economy has been a continuous decline in consumer debt. Consumer debt fell for the 8th consecutive month, for the first time, in September, declining by $15 billion.
Consumer debt grew by about $100 each year from 2004 through 2007. In 2008 it increased $40 billion. In 2009 it has fallen over $100 billion so far: from $2,559 billion to $2,456 billion. This still leaves over $8,000 in consumer debt for every person in the USA and $20,000 per family.
The huge amount of outstanding consumer and government debt remains a burden for the economy. At least some progress is being made to decrease consumer debt.
Those living in USA have consumed far more than they have produced for decades. That is not sustainable. You don’t fix this problem by encouraging more spending and borrowing: either by the government or by consumers. The long term problem for the USA economy is that people have consuming more than they have been producing.
The solution to this problem is to stop spending beyond your means by even increasing levels of personal and government debt. Thankfully over the last year at least consumer debt has been declining. Government debt has been exploding so unfortunately that problem has continued to get worse.
As we know, interest rates have fallen a great deal over the last few years. the federal funds rate sits at essentially 0% and money market funds now yield under 1%. However, credit card accounts that are charging interest increase to an interest rate of 14.9% from 13.6% in the 3rd quarter of 2008. In 2004 the credit card interest rate was 13.2%, 2005 – 14.6%, 2006 – 14.7%, 2007 – 14.7%, 2008 – 13.6%. All credit card balances should be paid off every month to avoid these excessive interest rates.
Data from the federal reserve and census bureau.
Related: Consumer Debt Declined a Record $21.5 Billion in July – The USA Economy Needs to Reduce Personal and Government Debt – Let the Good Times Roll (using Credit)
It is a shame that it is no surprise when a bank lies to you. I got a “priority notice” from my mortgage company that my 30 year fixed load could be reduced. They show big huge figures showing current interest rate, new interest rate, potential yearly savings of over $5,000… Complete lies. They are claiming savings with a completely different mortgage, a 5/30 year adjustable rate mortgage (which you have to turn over the paper and note they list “mortgage product: 5/1 ARM” and then know what that means).
Then they go on for a page with all sorts of text seemingly designed to confuse fools. Obviously they try to claim the savings are what is important and the different mortgages, risks of rising interest rates etc. are not important [why don’t they just make it a 30 year mortgage at the low rate, if they think the interest rate risk they try to stick the client with is such an unimportant detail that isn’t even mentioned on the front page with the “comparison” mortgage rates]).
Anyone that trusts any company that so blatantly tries to fool you is crazy. When they are not shy about using such obviously deceitful tactics you can’t trust them to do much much worse in ways that are very difficult to protect yourself from.
As I have said before, don’t trust your bank. More than any other companies I see, financial institution, treat customers as fools to be fleeced not customers to provide value to. It really is amazing people defend banks paying obscene bonuses to those that are able to fool financial illiterates into stupid decisions. The company trying to deceive in this case, did indeed fail (and was saved by the FDIC). Financial institutions have decided that they will just focus on tricking those that are not financially literate out of as much money as they possibly can. If you don’t educate yourself you are at great risk to be taken advantage of by financial institutions focused on finding people they can take advantage of.
Related: FDIC Study of Bank Overdraft Fees – Ignorance of Many Mortgage Holders – Don’t Let the Credit Card Companies Play You for a Fool – Customer Hostility from Discover Card – Legislation to Address the Worst Credit Card Fee Abuse – Maybe
Minnesota’s attorney general suing 3 debt-relief companies
The company failed to deliver on its promises, she said, forcing Anderson-Howze, of St. Paul, to become one of hundreds of Minnesota consumers to seek help from Minnesota Attorney General Lori Swanson.
Swanson sued Moneyworks LLC and two other debt assistance companies on Tuesday, alleging that the companies made unsolicited phone calls promising lowered interest rates, guaranteed savings and money-back guarantees. Swanson alleges that Washington-based Priority Direct Marketing, Clear Financial Solutions of Florida and Moneyworks LLC, based in Georgia, “charged financially strapped people a lot of money to lower the interest rates on their credit cards, only they failed to do so, leaving people even further behind on their bills.”
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Swanson also sent a letter to the Federal Trade Commission asking it to adopt federal regulations to prohibit companies from charging consumers until services are delivered satisfactorily.
Many organizations overing to help with debt relief are fraudulent. They are constantly being shut down for illegal activity. You must be very careful when you consider dealing with any of these organizations. Do not pay out money up front. Make sure the organization has a strong reputation and history of ethical behavior. Be financially literate: don’t get taken advantage of.
Related: Manage Your Borrowing and Avoid Debt Negotiators – USA Consumers Paying Down Debt – Continued Credit Card Company Customer Dis-Service
How a Family Shed $106,000 in Debt
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Several steps were key to making the plan work. Kandy and Russell eliminated discretionary spending. Kandy began buying generic food and frequenting thrift stores for clothing purchases. They stopped exchanging Christmas and birthday gifts with each other and their relatives.
Even with the drastic cutbacks, the Hildebrandts couldn’t cover the $2,000 they were sending to CCCS each month to be distributed to their creditors. At that time, the sum amounted to about half of Russell’s take-home pay. So Russell took on a second job cleaning a local grocery store several nights a week from midnight to 4:30 a.m. He would arrive home from his day job, eat dinner, catch a few hours of sleep and head to work. After his shift, he would go back home, sleep a few more hours and then get up for his day job.
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By the fall of 2008, the Hildebrandts had one year to go on the payment plan. Russell even started daydreaming about a new home when he saw a three-bedroom rambler for sale in New Richmond. It had all that they were looking for, including a large yard and a separate bedroom for Joey. Russell let a real estate agent know that they liked the house, but added that the family would have to pay off their debts before taking on a mortgage.
Several months later the agent called and asked if the Hildebrandts would be interested in a rent-to-own agreement. The current owner of the house had some health concerns and was eager to move. The monthly rent would be $1,000, which included $200 to be escrowed for closing costs. They could manage it.
Earlier this year, the owner wanted to accelerate the sale process. In April, using the tax credit for first-time home buyers, the Hildebrandts were able to swing the purchase and pay off the remaining balances on their credit cards about six months ahead of schedule.
It is certainly a daunting task to dig out off such a crushing debt load. It is much easier to avoiding getting in that situation in the first place (how not to get into trouble with credit cards). It is easy to get yourself in trouble by borrowing money. In many cases all it takes to not get into that trouble is just don’t buy what you can’t pay for.
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