Source: The Economic Collapse blog, by Michael Snyder
When debt grows much faster than GDP for an extended period of time, it is inevitable that a good portion of that debt will start to go bad at some point. We witnessed a perfect example of this in 2008, and now it is starting to happen again. Commercial bankruptcies have been rising on a year-over-year basis since late 2015, and this is something that I have written about previously, but now consumer bankruptcies are also increasing. In fact, we have just witnessed U.S. consumer bankruptcies do something that they haven’t done in nearly 7 years. The following comes from Wolf Richter…
US bankruptcy filings by consumers rose 5.4% in January, compared to January last year, to 52,421 according to the American Bankruptcy Institute. In December, they’d already risen 4.5% from a year earlier. This was the first time that consumer bankruptcies increased back-to-back since 2010.
However, business bankruptcies began to surge in November 2015 and continued surging on a year-over-year basis in 2016, to reach a full-year total of 37,823 filings, up 26% from the prior year and the highest since 2014.
Of course consumer bankruptcies are still much lower than they were during the last financial crisis, but what this could mean is that we have reached a turning point.
For years, the Federal Reserve has been encouraging reckless borrowing and spending by pushing interest rates to ultra-low levels. Unfortunately, this created an absolutely enormous debt bubble, and now that debt bubble is beginning to burst. Here is more from Wolf Richter…
The dizzying borrowing by consumers and businesses that the Fed with its ultra-low interest rates and in its infinite wisdom has purposefully encouraged to fuel economic growth, if any, and to inflate asset prices, has caused debt to pile up. That debt is now eating up cash flows needed for other things, and this is causing pressures, just when interest rates have begun to rise, which will make refinancing this debt more expensive and, for a rising number of consumers and businesses, impossible. And so, the legacy of this binge will haunt the economy – and creditors – for years to come.
Despite all of the economic optimism that is out there right now, the truth is that U.S. consumers are tapped out.
If the U.S. economy truly was doing great, major retailers would not be closing hundreds of stores. Sears, Macy’s and a whole host of other big retailers are closing stores because those stores are losing money. It truly is a “retail apocalypse“, and this trend is not going to turn around until U.S. consumers start to become healthier financially.
We also see signs of trouble in the auto sales numbers. Compared to 2016, sales were way down in January this year…
Compared to January last year, car sales collapsed for all three US automakers, and the largest Japanese automakers didn’t do much better:
- GM -21.1%
- Ford -17.5%
- Fiat Chrysler -35.8%
- Toyota -19.9%
- Honda -10.7%
- Nissan -9.0%
For all automakers combined, car sales sagged 12.2% from a year ago.
A lot of attention is given to our 20 trillion dollar national debt, and rightly so, but a similar amount of attention should be paid to the fact that U.S. households are collectively more than 12 trillion dollars in debt.
About two-thirds of the nation is essentially living paycheck to paycheck. Most families really struggle to pay the bills from month to month, and all it would take is a major event such as a job loss or a significant illness to plunge them into financial oblivion.
In America today we are told that the secret to success is a college education, but most young Americans have to go deep into debt to afford such an education.
As a result, most college graduates start out life in the “real world” with a mountain of debt. And since many of them never find the “good jobs” that they were promised, repayment of that debt becomes a very big issue. In fact, the Wall Street Journal has discovered that student loan repayment rates are much worse than we were being told…