Editor’s note: This is a lightly edited transcript of the accompanying video from Professor Peter St. Onge.
Americans are running out of money.
The U.S. savings rate hit a new low, and credit card balances hit a record high with 25% interest, according to the Federal Reserve.
That means the average American is currently sitting on their couch scraping together pennies and putting Hamburger Helper on their Visa.
According to the Bureau of Economic Analysis, the national personal savings rate just hit 2.9 percent, or 2.9 cents on the dollar.
This is the second worst rate in the past 75 years.
The driving force behind this is that inflation-adjusted real median household income (what the 50th percentile of households earn) has actually fallen since 2019, according to a new analysis.
In other words, in the American household sense, we’ve been in a recession for five years, so there’s savings, and so there’s debt.
Note that this is if we take the government’s inflation figures at face value: if, as many suspect, the official figures are lying, it means we’re much poorer than we were five years ago.
The last time this happened was during the financial crisis of 2008. Of course, we are not in the middle of a once in a century financial crisis right now. If you watch TV, you can see this is a Biden-Harris miracle.
So if prices rise but incomes don’t, the last person standing will empty their piggy bank and take a final look at the sofa cushions, only to find credit cards lined up as far as the eye can see.
What’s causing income stagnation? Three things: wages not keeping up with slow job growth, inflation itself, and the Federal Reserve’s interest rate hikes that have led to 25% credit card interest rates and 7.5% mortgage rates on a new $500,000 home.
Just looking at the numbers, consumer debt is growing by $300 billion a year, bringing consumer debt alone to a record $5.1 trillion, according to the Federal Reserve, plus $12 trillion in mortgage and other debt.
A big part of that is credit cards, which just hit an all-time high of $1.14 trillion, and according to Lending Tree, the average annual interest rate on credit cards just hit 24.92% — cheaper than the mafia.
Keep in mind that if credit card interest is 25%, that $1.14 trillion is nearly $2500 billion a year in credit card interest alone.
A recent ABC News story looked at how we got to $1.14 trillion, the path people took to get into the credit card hole, telling the story of an Indianapolis father who was barely able to pay his rent and food, but when he needed to replace his washer and dryer, he fell behind on the payments and his credit card debt quickly ballooned to $12,000, with 25% interest.
The fun continues. I recently mentioned that car repossessions are on the rise as supply chain shortages forced millions of Americans to buy more expensive vehicles during the pandemic because only higher spec vehicles could be produced. Repossessions are currently up 23% year over year. Yes, it’s a good time to be a repossession agent. And the recession hasn’t even hit yet.
So what’s next?
American consumers are living off depleted savings, credit card debt and government funds, and yet incomes are still falling.
None of this is sustainable, as we learned in 2008. But it’s much easier for Washington to postpone the problem and let Americans mortgage their future than it is to take the federal boot off the neck of job creators, entrepreneurs, small businesses, and manufacturers.
Economist Herb Stein famously said, “What doesn’t last forever stops.” The music is running out.
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