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The Consumer Debt Anchor
With home mortgages, the primary collateral for the loan balance is the home itself. In the event of a future default, the lender can file a foreclosure notice and take the property back several months later. With automobile loans, the car dealership or current lender servicing the loan can repossess the car.


Homeowners often refinance their non-deductible consumer debt that generally have shorter terms, much higher interest rates, and no tax benefits most often into newer cash-out refinance mortgage loans that reduce their monthly debt obligations. While this can be wise for many property owners, it may be a bit risky for other property owners if they leverage their homes too much.

With credit cards, lenders don’t have any real collateral to protect their financial interests, which is why the interest rates can easily be double-digits about 10%, 20%, or 30% in annual rates and fees, regardless of any national usury laws that were meant to protect borrowers from being charged “unnecessarily and unfairly high rates and fees” as usury laws were originally designed to do when first drafted.

Zero Hedge has reported that 50% of Americans don’t have access to even $400 cash for an emergency situation. Some tenants pay upwards of 50% to 60% of their income on rent. A past 2017 study by Northwestern Mutual noted the following details in regard to the lack of cash and high credit card balances for upwards of 50% of young and older Americans today:

* 50% of Baby Boomers have basically no retirement savings.

* 50% of Americans (excluding mortgage balances) have outstanding debt balances (credit cards, etc.) of more than $25,000. 

* The average American with debt has credit card balances of $37,000, and an annual income of just $30,000. 

* Over 45% of consumers spend up to 50% of their monthly income on debt repayments that are typically near minimum monthly payments.

 

Rising Global Debt 

 

According to a report released by IIF (Institute of International Finance) Global Debt Monitor, debt rose to a whopping $246 trillion in the 1st quarter of 2019. In just the first three months of 2019, global debt increased by a staggering $3 trillion dollar amount. The rate of global debt far outpaced the rate of economic growth in the same first quarter of 2019 as the total debt/GDP (Gross Domestic Product) ratio rose to 320%.

The same IIF Global Debt Monitor report for Q1 2019 noted that the debt by sector as a percentage of GDP as follows:

  
Households: 59.8%

* Non-financial corporates: 91.4%

* Government: 87.2%

* Financial corporates: 80.8%

 


Rate Cuts and Negative Yields

As of 2019, there’s reportedly an estimated $13.64 trillion dollars worldwide that generates negative yields or returns for the investors who hold government or corporate bonds. This same $13.64 trillion dollar number represents approximately 25% of all sovereign or corporate bond debt worldwide. 

 

On July 31, 2019, the Federal Reserve announced that they cut short-term rates 0.25% (a quarter point). Their new target range for its overnight lending rate is now somewhere within the 2% to 2.25% rate range. This is 25 basis points lower than their last Fed meeting decision reached on June 19th. This was the first rate cut since the start of the financial recession (or depression) in almost 11 years ago dating back to December 2008.
 

It’s fairly likely that the Fed will cut rates one or more times in future 2020 meeting dates. If so, short and long-term borrowing costs may move downward and become more affordable for consumers and homeowners. If this happens, then it may be a boost to the housing and financial markets for so long as the economy stabilizes in other sectors as well such as international trade, consumer spending and the retail sector, government deficit spending levels, and other economic factors or trends.

We shall see what happens in the near future in 2020 and beyond.

* The blog article above is a partial excerpt from my previous article entitled Interest Rate and Home Price Swings in the Realty 411 Magazine linked below (pages 87 - 91):
March 28, 2008

There Is A "Run On The Banks" By The Banks Themselves

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"The Government of Last Resort (i.e. The Federal Reserve) is working with the Lender of Last Resort (i.e most U.S. banks and investment banks) to shore up the housing and credit markets to avoid Great Depression II", economist Ed Yardeni wrote to clients.

What does this mean to the Average Joe and Jane on the street? It means that the vast majority of our financial institutions are INSOLVENT. According to data recently released by the Federal Reserve themselves last month, the estimated cash reserves of all U.S. banks (non - borrowed cash) is estimated to be near NEGATIVE $60 BILLION.

Without the newly created auction facilities formed by the Fed, the vast majority of the U.S. Banks would have NO CASH to maintain their day to day operations. Banks and Wall Street firms are borrowing an average of $30 to $32 Billion PER DAY from the Federal Reserve direct. These banks and investment banks (i.e. Bear Stearns, JP Morgan, Lehman Bros., Goldman Sachs, Merrill Lynch, etc.) are running to the Fed for emergency capital in the form of "cheap loans" (or bailouts).

What are the banks doing with these hundreds of billions of dollars of new cash? They are hoarding it for themselves in many cases. They are not increasing their lending to the American consumer in the form of home mortgages, credit card loans, auto loans, business loans, or student loans. The banks need the cash to survive, and they can't risk lending the money out to others.

The Wall Street Journal (March 27, 2008) had a great article entitled, "Ten Days That Changed Capitalism" about the state of the American financial system, the Bear Stears bailout, and how close we may have come to a complete financial meltdown. Hopefully, this mess may be sorted out in the near term. There may be tremendous investment opportunities to those individuals who have money set aside to buy the banks's discounted assets.

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