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I get the sense there is a deeper social issue at play here. Normally you would expect consumer spending to decrease with an increase in interest rates and prices. In econ 101, that should crush demand and yield lower debt levels. Who, in their right mind, would keep loading up a credit card balance with interest rates spiking to 20%?
Further, this seems to be skewed toward younger borrowers, many of whom have already been tossed the lifelines of a student debt pause, robust hiring, and wage growth--so this sudden jump in consumer debt would mean that they are using the windfall of a holiday from student debt payments to doubling-or-triple-down on discretionary spending rather than paying off balances.
What’s the explanation? Well, it doesn’t seem to be economics.
I think it’s social. People almost instantaneously became used to the high life financed by the government handouts of the pandemic, and the psychological effect of that flood of money is lasting long beyond the actual payments.
Actually, consumer behavior is focused on extending that high for as long as possible. When the money was gone, consumers supplemented it with debt, and even treated themselves to more consumption for the “good job” they did getting that raise or new job--even though neither the pay increase, or even the temporary loan holiday.
However, it is starting to look like the carousel is about to come to a screeching halt in June. Interest rates are almost certain to keep rising. The fed WANTS to destroy many of those new jobs. Prices for staples (food, shelter, transportation) are unlikely to come down appreciably. Student loan payments will resume. Finally, the political parties are certain to play a game of brinksmanship with the debt ceiling, all at the same time!
Whether the landing is hard or soft doesn’t really matter if you’ve overshot the runway and are out over the water now.
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I would consider this to be a result of the "great resignation." When so many young people have quit and refuse to accept a job that's "beneath them" they are going to have to depend on more credit card debt to pay for things not covered by their parents, like food and lodging. Having recently gotten a 6% COL raise and then a 4.25% performance-based raise, I just paid off another credit card, now only one left with a small balance to pay off next month.
I get the sense there is a deeper social issue at play here. Normally you would expect consumer spending to decrease with an increase in interest rates and prices. In econ 101, that should crush demand and yield lower debt levels. Who, in their right mind, would keep loading up a credit card balance with interest rates spiking to 20%?
I think the biggest problem is the disconnect between the issues because you have framed them wrong.
Ideally, interest rates should reflect two things:
1) The cost of borrowing; and
2) The Supply & Demand of money available to be borrowed.
Borrowing is not free. Someone has to make the journal entries and track the account, and then someone else has to audit the account. Having the borrower do all the paperwork and audit the account would be contrary to GAAP (Generally Accepted Accounting Principles.)
The Supply & Demand is not the entire money supply. You have 600+ separately functioning economies in the US, and within each of those 600+ separately functioning economies you have a number of organizations and not all of them are banks.
Take a furniture store. It isn't a bank but it does lend money. You buy $4,000 worth of furniture on credit effectively they're fronting you the $4,000 which you pay back with interest. A local furniture store doesn't have the cash/credit resources a regional furniture store has, and a regional shop (or shoppe) doesn't have the cash/credit resources a larger furniture chain would have.
Raising interest rates does not necessarily result in an increase in prices.
Sure, you can see price changes in the 160,000+ housing markets in the US as interest rates go up and down but that's tied to a phenomenon called Interest Inflation where low interest rates artificially inflate the prices of new homes and to a lesser extent the prices of existing homes.
But, as a manufacturer, are you impacted?
You probably have a revolving line of credit with a bank which you use to purchase raw materials and/or semi-finished goods to produce and distribute semi-finished goods or finished goods.
Your account will be fixed rate or variable rate and if it's fixed rate, no problemo.
Even if it's variable rate, do you raise prices?
Um, no.
Even if it is costing you a few dollars more, that's spread out over the volume of the goods you produce.
No one is going to panic if it's costing $0.001 more to manufacture a good.
Even if the additional cost approached $0.01, no one is going to panic. They'll eat it. Should it get to the $0.05 to $0.10 range, then yes you'd probably want to do a Price Elasticity test to see if raising prices will be harmful or not because increasing prices does not automatically guarantee increased revenues or increased profits or both.
True, many people live paycheck-to-paycheck but that is not the same as living credit-card-payment-to-credit-card-payment.
My credit card interest rates haven't changed, so it ain't costing me mo' money.
So, interest rates do not impact cash transactions. They don't impact credit card transactions, either, and if you don't believe that, you need only look at the data over the last 50 years which clearly indicates that if Americans intend to use their credit cards for a purchase they will, interest rates be damned. That's right. Americans are unconcerned with credit card interest rates.
Quote:
Originally Posted by wac_432
Further, this seems to be skewed toward younger borrowers, many of whom have already been tossed the lifelines of a student debt pause, robust hiring, and wage growth--so this sudden jump in consumer debt would mean that they are using the windfall of a holiday from student debt payments to doubling-or-triple-down on discretionary spending rather than paying off balances.
What’s the explanation? Well, it doesn’t seem to be economics.
I think it’s social.
It is, but not for the reasons you think.
There are attitudinal differences between the Silents, Boomer I, Boomer II, Tweeners, Generation X, Generation Y-Work, and the Z-Bots. The Z-Bots are a lot like the Silents but Generation Y-Work is more like Boomer II (who were too young to be drafted). They have a care-free attitude: party-hardy someone else will pay for it.
Quote:
Originally Posted by wac_432
However, it is starting to look like the carousel is about to come to a screeching halt in June. Interest rates are almost certain to keep rising. The fed WANTS to destroy many of those new jobs. Prices for staples (food, shelter, transportation) are unlikely to come down appreciably.
Like many on this forum, the Federal Reserve doesn't understand the difference between Monetary Inflation and Demand-pull/Cost-push Inflation.
Prices rose because of supply chain issues and higher fuel prices.
Interest rates have no impact on global oil supply/demand and cannot fix supply chain issues.
Prices are dropping for many items because supply chain issues are being resolved --and the Free Market will ultimately correct any and all issues just not in 0.03 seconds -- but still high due to higher fuel costs (Cost-push Inflation.)
In some regions of the US, there is localized Wage Inflation due to labor shortages, resulting in higher wages which have added Wage Inflation to Demand-pull Inflation and Cost-push Inflation, but that has nothing to do with Monetary Inflation.
Quote:
Originally Posted by wac_432
Student loan payments will resume.
Not until the end of the year. It isn't scheduled to be heard until June and it will be probably 90 days or more before the Court actually issues a ruling.
True, many people live paycheck-to-paycheck but that is not the same as living credit-card-payment-to-credit-card-payment.
There are attitudinal differences between the Silents, Boomer I, Boomer II, Tweeners, Generation X, Generation Y-Work, and the Z-Bots. The Z-Bots are a lot like the Silents but Generation Y-Work is more like Boomer II (who were too young to be drafted). They have a care-free attitude: party-hardy someone else will pay for it.
Student Loan Resumption -- Not until the end of the year. It isn't scheduled to be heard until June and it will be probably 90 days or more before the Court actually issues a ruling.
I don't see how the genie can be put back in the bottle on federal student loans. These are debts that are now going on year four of no payment due. These are going to get forgiven somehow, someway, or there will be a lot of hue and cry among the debtors.
And yes, I feel bad for those people (and I only know a few peeps who signed up for these federal loans -- my generation luckily avoided them) who already paid their student loans in full.
Take a furniture store. It isn't a bank but it does lend money. You buy $4,000 worth of furniture on credit effectively they're fronting you the $4,000 which you pay back with interest. A local furniture store doesn't have the cash/credit resources a regional furniture store has, and a regional shop (or shoppe) doesn't have the cash/credit resources a larger furniture chain would have.
Raising interest rates does not necessarily result in an increase in prices.
Sure, you can see price changes in the 160,000+ housing markets in the US as interest rates go up and down but that's tied to a phenomenon called Interest Inflation where low interest rates artificially inflate the prices of new homes and to a lesser extent the prices of existing homes.
The furniture store is a loan originator but it's not their money. I've got two interest free deals going with Synchrony right now (solid outfit, by the way), one for flooring (4 years no interest) and one for furniture (5 years no interest). I'd be interested in knowing what the deal is between the furniture company and the creditor. I'm guessing the store pays Synchrony a percentage of the total sale and that's how they make their money. The carrot for the store is that they get to move more merch. I certainly bought more furniture than I otherwise would have because of the fabulous terms of the deal.
As for rising interest rates, after the initial shock people adjust both their thinking and spending. I live in what is still a hot housing market and things slowed down for a bit, and you're starting to see some small price adjustments downward (say $5k or $10k on a $750k house), but really all higher interest rates have done is stabilize my market at a higher level than it was pre-Covid.
To really slow the roll of inflation you'll need a serious spike in unemployment or a liquidity crisis and I don't think you'll get either. A demographer I've listened to several times on Youtube says the inflation will be with us for at least a decade as we're in peak Boomer retirement and Gen-X isn't big enough to step into all those vacated rolls. 10 years is what it will take for Gen-Z to pick up the slack. Good news for Gen-X in terms of pay and benefits.
I get the sense there is a deeper social issue at play here. Normally you would expect consumer spending to decrease with an increase in interest rates and prices. In econ 101, that should crush demand and yield lower debt levels. Who, in their right mind, would keep loading up a credit card balance with interest rates spiking to 20%?
Further, this seems to be skewed toward younger borrowers, many of whom have already been tossed the lifelines of a student debt pause, robust hiring, and wage growth--so this sudden jump in consumer debt would mean that they are using the windfall of a holiday from student debt payments to doubling-or-triple-down on discretionary spending rather than paying off balances.
What’s the explanation? Well, it doesn’t seem to be economics.
I think it’s social. People almost instantaneously became used to the high life financed by the government handouts of the pandemic, and the psychological effect of that flood of money is lasting long beyond the actual payments.
Actually, consumer behavior is focused on extending that high for as long as possible. When the money was gone, consumers supplemented it with debt, and even treated themselves to more consumption for the “good job” they did getting that raise or new job--even though neither the pay increase, or even the temporary loan holiday.
However, it is starting to look like the carousel is about to come to a screeching halt in June. Interest rates are almost certain to keep rising. The fed WANTS to destroy many of those new jobs. Prices for staples (food, shelter, transportation) are unlikely to come down appreciably. Student loan payments will resume. Finally, the political parties are certain to play a game of brinksmanship with the debt ceiling, all at the same time!
Whether the landing is hard or soft doesn’t really matter if you’ve overshot the runway and are out over the water now.
I'm not going to argue that we aren't plagued by short-term thinking these days, but the inflation has been really rough on those at the lower end of the income spectrum, and if you were on the edge before hand, I'm not surprised that people are having to make hard choices and using credit to fill the gap. Sure you can cut your spending, but eventually you get to the bone. Your car needs a repair so you can keep going to work, your kids need to eat and be clothed and housed. Those are things you don't have the luxury of ignoring because you're out of money. People also assume things will get better over time and then find themselves in a real hole when it doesn't.
A mass default on credit as our society will have significant near term and long term effects and consequences. It will disrupt our entire economic system and collapse asset values everywhere. I really don't think people understand the material impacts that will occur. The government will have 0 tools at their disposal to combat this.
Credit card debt is at record highs and we saw a spike in job numbers. I'm thinking people can't afford basic necessities anymore because of inflation and they've been forced to take on second jobs hence the job numbers spike.
I probably sound like a broken record, but I think once the student loan payments restart for 40,000,000 Americans we're going to see a pretty big economic collapse. Retail numbers the following quarter will likely be absolutely abysmal which will trickle into everything else.
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