Household Debt Takes a Big Jump
BOB STOKES • AUGUST 9, 2021
Here's an excerpt from an August 3 CNBC article headlined "Household debt jumps by the most in 14 years to nearly $15 trillion in the second quarter":
Household debt rose by its highest dollar amount in 14 years during the second quarter, thanks mostly to a surge in the housing market that brought the collective American IOU to just shy of $15 trillion, the Federal Reserve reported [August 3].
Total debt balances jumped $313 billion in the April-to-June period, the sharpest rise since the same period in 2007.
As a share of debt, that represented a 2.1% increase, the fastest pace since the fourth quarter of 2013.
Most of the gain came from mortgage originations, both initial purchases and refinances, which have been on fire as the Federal Reserve has kept benchmark borrowing rates anchored around historic lows.
Mortgage balances increased $282 billion for the period, up 2.8% rise from the first quarter and 6.7% from a year ago, for a total of $10.4 trillion.
Over the past four quarters, mortgage originations have totaled close to $4.6 trillion, amounting to 44% of all outstanding home loan balances.
But the swelling debt numbers weren't just about mortgages, with non-housing balances up $44 billion.
Credit card balances increased by $17 billion, while auto loans were up $33 billion. Student loan debt actually decreased for the period, falling $14 billion to $1.57 trillion as forbearance programs have kept education-related balances in check.
This surge in household debt is a concern because economic depressions in the U.S. during the past 200 years have been accompanied by a "deflation of excess credit."
Here's a quote from Robert Prechter's Conquer the Crash:
The Primary Precondition of Deflation
Deflation requires a precondition: a major societal buildup in the extension of credit and the simultaneous assumption of debt. Austrian economists Ludwig von Mises and Friedrich Hayek warned of the consequences of credit expansion, as have a handful of other economists, who today are mostly ignored. Bank credit and Elliott wave expert Hamilton Bolton, in a February 11, 1957 personal letter to Charles Collins, summarized his observations this way:
In reading a history of major depressions in the U.S. from 1830 on, I was impressed with the following:
(a) All were set off by a deflation of excess credit. This was the one factor in common.
(b) Sometimes the excess-of-credit situation seemed to last years before the bubble broke.
(c) Some outside event, such as a major failure, brought the thing to a head, but the signs were visible many months, and in some cases years, in advance.
(d) None was ever quite like the last, so that the public was always fooled thereby.
(e) Some panics occurred under great government surpluses of revenue (1837, for instance) and some under great government deficits.
(f) Credit is credit, whether non-self-liquidating or self-liquidating.
(g) Deflation of non-self-liquidating credit usually produces the greater slumps.
Self-liquidating credit is a loan that is paid back, with interest, in a moderately short time, from production. Production facilitated by the loan -- for a business start-up or expansion, for example -- generates the financial return that makes repayment possible. The full transaction adds value to the economy.
Non-self-liquidating credit is a loan that is not tied to production and tends to stay in the system. When financial institutions lend money to consumers for purchases of cars, boats or homes, or for speculations such as purchases of stock certificates and financial derivatives, no production effort is tied to the loan. Interest payments on such loans must come from other sources of income. Contrary to nearly ubiquitous belief, such lending is almost always counter-productive; it adds costs to the economy, not value...
Near the end of a major expansion, few creditors expect even the weakest borrowers to default, which is why they lend freely. At the same time, few borrowers expect their fortunes to change, which is why they borrow freely. Deflation involves a substantial amount of involuntary debt liquidation because almost no one expects deflation before it starts. |
