Economic decline is painful both financially and psychologically. The tendency is to live in denial for as long as possible. But there’s a limit. The unstoppable logic of accounting itself eventually imposes a reality that no one likes. And we seem to be headed this way on multiple fronts. Let’s have a look at the signs all around us.
Following 15 years of zero interest rates, the Fed has finally reversed itself. This is a huge gift to savers, who have been robbed for years. Especially once the inflation kicked in, real interest rates fell to historic lows, so there was no way to make money while saving money. The one saving grace of our times is that U.S. Treasurys are finally yielding a positive return. Even the old certificate of deposit is yielding 5.3 percent for the first time since 2007. That’s well above the inflation rate. That seems like a great place to park some savings.
That works if you have savings. Normally under these new conditions, you'd see a massive shift out of debt into savings, especially out of credit cards that are charging 20-plus percent in interest. But this presumes that people are in a position to move money around. If household finance is in such a sorry condition that this isn’t possible, you get the worst of all worlds: the middle class paying huge rates to service loans while only the rich stand on the other side of the ledger, earning a large return with virtually no risk.
That seems to be exactly what’s going on. The personal savings rate is falling again, even in the middle of the greatest opportunity for saving money in a generation. At the same time, credit card debt is soaring even at the worst time in a generation to hold revolving accounts that are charging ridiculous rates. In other words, we’re seeing the exact opposite of what one would expect. All of the signals are there for people to save money and spend less, but the opposite is happening.
How in the world is this happening? The issue is that most U.S. households have found themselves in an impossible financial pinch. They leveraged up everything over the years in which money seemed nearly free for the taking. It was car loans and huge mortgages, plus credit card debt. The income stream serviced loans, and life seemed good. There was no real point in saving money because rates were so low.
But that calculation has dramatically changed in two years. Now it makes massive sense to save money, but there’s less of it in the bank for the average family to save anything. Servicing the loans has become ghastly expensive even as high inflation has eaten away the value of the dollar. Indeed, the value of the U.S. dollar in terms of goods and services has fallen some 17 cents in 2 1/2 years.
Interest rates have finally hit the positive side of the ledger in the past month or so, depending on how one calculates inflation. It’s certainly worth moving money and deferring consumption. But such choices aren’t typically available to people now. Even with two incomes, the debt burden is too high. And there’s simply no option to pay it off and benefit from the higher rates of return on savings.
What about younger people with student loan debt? Such loans have been forgiven for nearly four years because of COVID-19 (how and why a virus should affect loan payments is another issue). Many in this group concluded that their loans will ultimately be forgiven, so they stopped worrying about them. That was a mistake because the courts have struck down the Biden administration’s plan to forgive these loans. The debt collectors are coming, but where’s the money?
“As a result, borrowers are in a worse position financially than before the pandemic,” Ms. Finley writes. “A Fidelity survey this month reported that two-thirds of borrowers say they don’t know how they will resume making payments once the pause ends next month. Some in the media call the restart a ‘student loan cliff.’ This is overdramatic, but nobody should be surprised if borrowers, lured by government promises of loan forgiveness, sleepwalk over the proverbial ledge.
“According to a recent TransUnion study, 53 percent of student-loan borrowers added bank credit card debt during the pandemic, while 36 percent took on new auto loans and 15 percent took out new mortgages. When student-loan payments restart, borrowers will have less liquidity to make these other debt payments—some of which carry higher interest rates.
The sectors for which this isn’t the case are retail, where there’s still a shortage of labor, as well as health care and finance. Here, salaries are actually higher. So it’s like playing the lottery. Those who lose end up using most of the wages and salaries to service accumulated debt even as student loans are coming due. Those without debt and in professions with labor shortages are in a position to survive the coming storm.
In the end, all of this is unsustainable. The bills eventually come due. Zero interest rates beginning in 2008 created massive distortions in the industrial sector that massively over-financialized the economy. The winners throughout this period are winning again under higher rates even as most of the population is in a position of woeful financial dependency.
The end result is that for the first time in a generation or two, it pays to save money if you know what you’re doing. If you’re out of the habit or find doing so impossible, you end up paying more than ever. That well describes the U.S. middle class today, holding a financial candle that’s burning at both ends.
