by SchiffGold  0   0

American consumers ran up more debt in December as last year saw consumer debt increase at the fastest pace in five years.

This could prove problematic for the Federal Reserve as it contemplates raising interest rates.

Consumer borrowing slowed somewhat in December from the torrid pace in November when debt grew by the largest amount in 20 years. Nevertheless, Americans continue to add red ink to their personal ledgers at a rapid clip.

Total consumer debt grew by $18.9 billion in December, according to the latest data from the Federal Reserve. That represents a 5.1% annual increase. Total consumer debt now totals $4.43 trillion.

The Federal Reserve consumer debt figures include credit card debt, student loans and auto loans, but do not factor in mortgage debt. When you include mortgages, Americans are buried under nearly $15 trillion in debt.

Revolving debt – primarily credit card balances – grew by 2.4% year-on-year in December. Americans took on another $2.1 billion in credit card debt, pushing the total to just under $1.04 trillion.

Non-revolving debt, including auto and student loans, grew by $16.8 billion, a 6% year-on-year increase. Non-revolving debt now stands at $3.39 trillion.

Mainstream reporting tends to spin increasing consumer debt as good news. According to the narrative, Americans believe that the economy is strong and they feel confident enough to borrow money. But heavy borrowing could just as well be a sign of consumer distress. It may well be they’re turning to debt to make ends meet as the inflation freight train strains their budgets.

Americans, by and large, kept their credit cards in their wallets and paid down balances at the height of the pandemic in 2020. This is typical consumer behavior during an economic downturn. Credit card balances were over $1 trillion when the pandemic began. They fell below that level in 2020. We saw small upticks in credit card balances in February and March of last year as the recovery began, with a sharp drop in April as another round of stimulus checks rolled out. But Americans started borrowing in earnest again in May. Since then, we’ve seen a steady increase in consumer debt.

The mainstream might be correct in thinking Americans are borrowing more because they are confident in the economy. But it seems more likely higher prices and an absence of stimulus checks are forcing Americans to borrow more to buy stuff they can’t afford. And in fact, consumers are increasingly expressing worry about inflation and its impact on the economy.

The Federal Reserve and the US government have built a post-pandemic “economic recovery” on stimulus and debt. It is predicated on consumers spending stimulus money borrowed and handed out by the federal government or running up their own credit cards.

Meanwhile, rising prices have squeezed American wallets. Real incomes are falling.

Now, the Fed is threatening to turn off that easy money spigot. How is that going to work?

Short answer: it won’t. This is one of many reasons Peter Schiff says the Fed can’t do what it’s promising to do.

How will consumers buried under more than $1 trillion in credit card debt pay those balances down with interest rates rising? With rising rates, minimum payments will rise. It will cost more just to pay the interest on the outstanding balances.

This does not bode well for an economy that depends on consumers spending money on stuff imported from other countries.

The only reason Americans can borrow money is because the Fed enables them. It’s holding interest rates artificially low so that people can pay the interest on all this money that they’re borrowing. And that is what is helping to create a lot of these service sector jobs that would not exist but for the ability of Americans to go deeper into debt.

So, the impact of rate hikes will ripple through the entire economy. This is one of the reasons it’s unlikely the Fed will be able to follow through with monetary tightening. It will topple the pillars that support the economy.

Economist André Marques says the Fed is trapped. It doesn’t really have room to raise rates or taper.

The Fed is trapped in its own web. It does not have much room to raise rates without major complications in the financial market and in the economy. Even if it finally delivers on tapering and starts raising rates, it won’t get any further than it did back in the last rate hike (2015–18) and balance sheet shrinking (2017–19) cycles.”

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