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Consumer Debt Was Already Surging Before Coronavirus

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The solution to the coronavirus economic meltdown is to borrow our way out of it. The Federal Reserve slashed interest rates to zero and the stimulus bill makes all kinds of loan programs available to pretty much anybody and everybody. But American consumers were already up to their eyeballs in debt before the coronavirus lockdowns. In fact, consumer debt spiked again to yet another record in February, according to the latest data from the Federal Reserve.

Total consumer debt increased by $22.3 billion in February to a record total of $4.23 trillion.

The Fed consumer debt figures include credit card debt, student loans and auto loans, but do not factor in mortgage debt.

Revolving debt, primarily made up of credit card balances, rose by $4.2 billion. At the end of February, Americans owed nearly $1.1 trillion in credit card debt alone.

Non-revolving credit, primarily made up of student and auto loans, surged $18.1 billion. That was the biggest increase in non-revolving debt since 2015.

Keep in mind, this was before the full impacts of the coronavirus economic shutdown. That raises the question: how will a recovery plan built on borrowing work when consumers are already levered up to the hilt?

There were already signs of trouble in the consumer credit market before the COVID-19 crisis. Balances more than 30-days delinquent on credit cards issued by the roughly 4,500 banks smaller than the top-100 surged to 7.05% in the fourth quarter of 2019. That’s the highest delinquency rate in this category going all the way back to the 1980s. These smaller banks hold the bulk of the subprime credit card debt. In other words, the riskiest borrowers were already in trouble before the mass layoffs and work shutdowns in response to the pandemic.

Meanwhile, subprime auto loan delinquencies exploded during the same period, taking the overall delinquency rate to Financial Crisis levels.

The fact that consumers were already levered up raises three significant problems as the government and central bank try to deal with the economic impact of the federal and state governments shutting down the US economy.

In the first place, borrowing is supposed to be the solution. But how can Americans take on more debt? They were already close to maxing out the credit cards before the pandemic. Now they’re not working and probably putting more on plastic just to make ends meet. That can’t last long.

Secondly, consumer spending is supposed to spur the economy to recovery. In fact, Americans were driving the economy with borrowed money before coronavirus. At the end of 2019, total consumer debt stood at 19.3% of nominal GDP. This was the highest level ever. Even before coronavirus, we were asking how long the borrowing could keep going and warning that when it stopped, economic growth would likely stop along with it. Now the powers-that-be are depending on more borrowing to save the economy. People can only borrow so much. Credit cards have a limit.

And even if those limits get raised to deal with the crisis, the money all has to be paid back. If we’re borrowing trillions now, what does that mean for future economic growth as we try to pay the trillions back?

And that brings us to the final big problem. How will the Federal Reserve ever exit from the extraordinary monetary policy when everybody is buried in debt? I’ve already asked: what’s the exit strategy? The obvious answer is there isn’t one.

The Fed wasn’t able to exit from the extraordinary monetary policy after the 2008 crisis. When it tried in 2018, the stock market tanked and Jerome Powell abandoned the effort. With trillions in new debt on top of the trillions on old debt, there is simply no way the central bank can allow interest rates to rise.

So, what? Perpetual money printing? That’s a prescription for inflation.

As Peter Schiff put it in a recent interview, the economy was already a wreck before the pandemic.

Nobody had saved anything for a rainy day. Well, take a look outside. It’s not only raining; it is pouring. And we’ve got nothing.”

During an appearance on RT Boom Bust last December, Peter was already painting a pretty gloomy picture of the American consumer.

The consumer is completely levered up. He has record amounts of debt.  And the only reason he can spend is because the Fed is keeping rates low enough so that credit continues to flow despite the lack of legitimate savings to finance it. So, this whole house of cards is going to come tumbling down and the consumer is going to be right in the center of that.”

Now the coronavirus has made things even worse. And the plan for cleaning up the mess seems to be dumping more mud on the floor.

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About The Author

Michael Maharrey is the managing editor of the SchiffGold blog, and the host of the Friday Gold Wrap Podcast and It's Your Dime interview series.
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