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US Consumer Debt Continues to Balloon

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Last summer, US Global Investors CEO Frank Holmes called debt “the mother of all bubbles.” That bubble continues to blow up.

US consumer debt increased even more than expected in September. According to data released by the Federal Reserve, total credit rose by $20.8 billion, an annualized rate of 6.6%. Analysts had expected an increase in the neighborhood of $18 billion. It was the largest increase in overall consumer indebtedness since last year’s holiday season.

Credit card spending helped drive overall consumer debt higher. Revolving credit rose by $6.3 billion in September, on the heels of a $5.6 billion increase in August. Total credit card debt in the US has now surged past the $1 trillion mark.

Non-revolving debt, the category that includes auto and student loans, also pushed higher. According to a Bloomberg report, a jump in motor vehicle purchases as consumers replaced vehicles damaged by Hurricanes Irma and Harvey drove up debt in the category. Loans for motor vehicles rose by $19.3 billion in the third quarter of this year.

Lending by the federal government rose by $35.2 billion in Q3 2017. This primarily reflects increases in student loan debt. According to the ABA banking journal, federal government holdings of student loans continue to make up the largest portion of non-revolving credit. It comprises approximately 40.5% of outstanding debt.

So, what does all this mean?

Bloomberg put it this way.

While home values and stock prices have climbed, generating more wealth for some Americans, other households with fewer assets may find it difficult to boost their spending as their debt burdens mount.”

In other words, increasing debt levels will likely temper future spending and could put a significant drag on the economy. This will become especially acute if the Federal Reserve continues pushing interest rates up. That will increase payments on outstanding debt.

The middle class is already struggling to make ends meet. After the Toys R Us bankruptcy, Peter Schiff noted that Amazon isn’t the only problem for brick and mortar retail. A bigger issue is that the American consumer is broke.

Another reason people are shopping on the internet, other than just the convenience of not leaving your house when you’re doing your shopping, is the fact that the average American shopper is broke. They can barely afford to buy the stuff that they’re buying. In fact, most people are buying stuff that they can’t afford. They’re just buying anyway and they’re using a credit card…Retailing is a shrinking market because Americans’ pocketbooks are shrinking, their paychecks are shrinking.”

A recent article by Business Insider raised an interesting question: How can the following two things be true at the same time?

  1. Household debt — in aggregate — is above levels last seen just before the economic calamity that hit America a decade ago.
  2. Everything is fine.

That’s a line you’ll hear from Wall Street economists, who are noticing the high debt but also telling their clients it won’t hurt. The explanation is wealthy people. US economic growth has become so skewed toward the wealthiest households that data showing healthy consumer balance sheets masks underlying troubles facing middle-class and poor Americans.”

Deutsche Bank did some analysis that sheds light on this phenomenon. When you look at overall household earnings, Americans are making enough to pay back outstanding debt. But as the Deutsche Bank report noted, the booming incomes of the wealthy skew the big picture. “Underneath the surface, there may be incipient cracks forming.”

Some measures of income growth have slowed; the saving rate has fallen to near record-low-levels; measures of consumer credit demand and credit growth have weakened, and balance sheets have become more fragile for the lower part of the income distribution.”

The net worth to income ratio has decreased in every sector of the income distribution except for the top 10%. In other words, debt is starting to smother the poor and middle classes.

Last summer, Holmes warned that the debt bubble will eventually burst. There are certainly signs the pop could be imminent. He recommended investors should buy gold and called the yellow metal’s long-term investment case “bright.” He said if and when the mother of all bubbles pops, it could potentially spell trouble for the investor who hasn’t adequately prepared with some allocation in a safe haven.

Another crisis could be in the works. Savvy investors and savers might very well see this as a sign to allocate a part of their portfolios in ‘safe haven’ assets that have historically held their value in times of economic contraction. Gold is one such asset that’s been a good store of value in such times.”

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