This Could Cause Another U.S. Financial Collapse in Trump's First Term Lombardi Letter 2017-09-07 02:13:45 Consumer debthousehold debteconomic collapseDonald Trumpfinancial collapsefinancial crisiscredit card debtconsumer debtcar loans Many Americans are facing an increasing household debt problem. This could lead to a financial collapse in the next few years. U.S. Economy https://www.lombardiletter.com/wp-content/uploads/2017/01/U.S.-Financial-Collapse-150x150.jpg

This Could Cause Another U.S. Financial Collapse in Trump’s First Term

Household Debt Is Rising and Could Cause Financial Collapse During President Trump’s First Term

Despite the best efforts of fake news peddlers, American families seem eager for President-elect Trump to settle into the White House. But many of these Americans are facing an increasing household debt problem. It could lead to another, and even worse, financial collapse in the next few years.

Rising household debt levels could be the real undoing of the American economy, despite Trump’s best efforts. Credit card debt and related delinquencies are approaching levels not seen since the days that preceded the financial collapse of 2008.

It’s even more troubling that, as debt levels start rising again, average wages have not made any noteworthy gains. (Source: “WSJ’s Daily Shot: Americans Are Loading Up on Credit-Card Debt,” The Wall Street Journal, January 9, 2017.)

There’s no way to sugar-coat it with some Barack Obama-style optimism. U.S. consumption remains driven by debt. This puts the economy on precarious ground. As the chart in The Wall Street Journal Article cited above shows, personal or household debt exceeds the threshold before the outbreak of the last financial collapse—related to the subprime crisis—nearly a decade ago. (Source: Ibid)

Credit Card Debt Is Rising at Pre-2008 Financial Crisis Levels

The New York Federal Reserve reported that per capita credit card debt, which might best reflect the financial reality of American consumers, has grown 10% in 2016. (Source: “Americans are now in more debt than they were before the financial crisis,” MarketWatch, December 20, 2016.)

Credit card debt on average is $16,061; it was $14,546 10 years ago, and was $15,762 in 2015.

Credit card debt is still below the $16,912 level of 2008. But it seems reasonable to expect that, by 2019, Americans will have exceeded that dubious record. The increase won’t even happen because of a failure to control discretionary spending.

The higher Fed rates and rising debt levels for what are necessities, from mortgages to student loans, will add to credit card balances regardless. Indeed, if you add mortgages and loans, Americans face greater overall debt levels than before the Great Recession as they start off the new year. (Source: Ibid.)

Note that these figures have not taken into consideration car loans. These have been one of the more troubling phenomena of recent months. The proliferation of alternative—and more expensive sources of credit—have fueled a car loan bubble in 2016.

High Levels of Private Debt Are a Wake-Up Call

Trump’s presidency appears to have generated excitement among consumers, with his protectionist promises and focus on generating employment. But confidence is a risk, and its result is inescapable. Many Americans find it difficult to save money, and this could cripple the economy in the next few years.

Even greater financial discipline prevents average Americans from meeting monthly expenses. Thus they are forced to resort to different forms of financing to live until the next paycheck. In other words, many Americans are already living near a state of financial collapse.

Americans are struggling to make ends meet. For critics who suggest that households give up Internet or cellphones, these are so ubiquitous in society that they can no longer be considered luxuries. Given the dismal state of public transportation in most large North American cities, to expect people to give up cars is also unrealistic. Cars are tools to get to work.

Urban planning policies from the 1960s have favored the automobile; even getting food to cook at home often requires a car trip. In just a few days, Donald Trump will formally take office as the 45th U.S. president. Judging by President Obama’s farewell speech in Chicago, Trump shall inherit an economy that is in great shape. But, even if the unemployment rate stands at just above 4.5%, gross domestic product (GDP) growth is far lower than its potential.

Trump has promised huge tax cuts and a trillion dollars’ worth of infrastructure spending over the next four years. But American household debt being at pre-crisis levels signal a warning. Thus, household debt, perhaps even more than GDP, is one of the key indicators of how well the U.S. economy is actually performing.

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