The Consequences of Massive Debt? Your Lifestyle Downgrade Is on the Way!

The Consequences of Massive Debt? Your Lifestyle Downgrade Is on the Way!
Image via Nik Shuliahin

From Peter Reagan at Birch Gold Group

The economy depends on consumer spending, which makes up approximately two-thirds of total economic activity.

That spending activity is generally measured by looking at gross domestic product (GDP), although GDP isn’t just a measure of spending.

If all you did was listen to the White House, you might think that Bidenomics was the best thing since sliced bread:

“Economists are turning optimistic on the U.S. economy.  They now think it will skirt a recession…

In fact, over the last four quarters, real GDP has grown at a healthy 2.9%, far surpassing the consensus 0.2% growth projected last year.

According to Biden’s administration, your recent trips to the grocery store, gas station, and your energy bills are all “just fine.”

The reality is this: It appears that gas prices are finally falling from previously historic highs, based on spending trends. That means they could be providing a little bit of relief from Bidenomics:

During normal economic times, the above might look as though the economy is finally starting to recover. Perhaps that’s why “economists are turning optimistic?”

But once again, if we take a deeper look under the hood of this “recovery,” it reveals that a soft landing could be more wishful thinking than reality.

Credit card and “phantom” debt levels skyrocketing

Since the economy depends on spending, once consumers are tapped out and weighed down by too much debt, then overall spending could suffer dramatically.

At that moment an economic downturn could start, and who knows how long it could last? Unfortunately, the process appears to be underway…

According to a recent Bankrate survey, balances on high-interest credit cards are being carried over at a much higher rate:

In November 2023, 49 percent of cardholders fell into this credit card “debt revolver” category — up from 39 percent in 2021 and 47 percent in July 2023.

This finding comes amid the legacy of high inflation, which has increasingly caused consumers to turn to their credit cards to make ends meet. Total credit card balances hit a high of $1.08 trillion in the third quarter of 2023, according to the Federal Reserve Bank of New York — a figure that is up $48 billion over the quarter and $154 billion over the year. Interest on this debt is also increasing, with the Federal Reserve reporting the average APR for revolving credit at 22.77 percent as of the third quarter.

Now that pandemic cash savings have evaporated for 80% of people, if things get tough financially, consumers are likely to keep using credit cards to stay afloat. In fact, for most of Biden’s term, consumer credit appears to be at least one way that Americans are spending on their purchases.

The data show that the monthly increase of consumer credit use (including credit cards) has surpassed 5% for about half of his term.

Another interesting thing about the chart above, is it appears to be missing the economic downturn at the beginning of the COVID panic in March 2020.

But let’s assume the total consumer credit trend isn’t any worse than the chart above illustrates. There is still another specter haunting the economy…

It’s called “phantom debt.” An article on the CNBC website explains what this type of debt is, and the big question it represents:

“Because no central repository exists for monitoring it, growth of this ‘phantom debt’ could imply total household debt levels are actually higher than traditional measures,” said Tim Quinlan, senior economist at Wells Fargo and co-author of the report.

Since buy now, pay later loans are not currently reported to major credit reporting agencies, that makes it a challenge for a lender to know how many loans a consumer has outstanding, Quinlan said.

“It’s hard to know how much of this debt is out there,” said Ted Rossman, senior industry analyst at Bankrate.

No one is really able to track phantom debt, so how can we get a clearer picture of the impact it’s having?

The answer: Look at the companies who offer that kind of credit, and see what their delinquency rate is.

American Banker published an interview with an executive of one of the companies that offer this kind of credit to its customers:

The economy is more than likely in the beginning stage of a downturn,” Affirm CEO Max Levchin told analysts during a conference call to discuss its earnings for the quarter ended June 30, noting that it’s too early to tell how severe or lasting a downturn might be.

The delinquency rate for Affirm’s point-of-sale loans rose above 2% for the first time this year in July and August, prompting the San Francisco-based lender to tighten its underwriting criteria, Levchin said. The default rate was about 1% a year ago.

The minimum delinquency rate is 2.44% according to Affirm’s 3Q2023 quarterly report, and that is an increase of more than 100% over a year ago.

Obviously, Affirm doesn’t represent the entire phantom debt industry as a whole, but it is having trouble with delinquencies.

I think it’s safe to assume this is an industry wide trend. (We won’t know for sure until it’s too late to do anything about it.)

Now let’s take a look at what consumers are searching for online, to see what that reveals about this (still) alarming debt situation.

Desperate Americans ask Google for help with debt

One way Americans could deal with a large credit card debt load is to transfer high balances to a loan that charges a lower interest rate. It’s called a balance transfer loan.

To find that online, some consumers use the phrase “balance transfer.” Those searches are up 31% over the last year:

Monthly search volume for phrase balance transfer

Via Glimpse

Keep in mind, the phrase “balance transfer” probably isn’t as popular as “debt consolidation,” which is another phrase used to find this type of loan.

But there is an even more direct search that indicates consumers have been looking for answers for most of Biden’s term, and it’s up 20% more over the last year:

Monthly search volume for cant pay credit card

Via Glimpse

Granted, a certain percentage of consumers will always run into trouble, and won’t be able to pay their credit card bills.

But in addition to other consumers who are buried in different kinds of debt and might be paying their bills (for now), those who can’t pay their bills won’t be spending as much in the economy.

So the bottom line here is this: Just like Biden’s job numbers, the real economic reality in the United States appears like it’s being glossed over by the White House.

The potential for an incredibly hard landing for the U.S. economy is still very much in play. The way to hedge against that reality is to prepare for the worst possible scenario, and hope for the best.

That way, on the off chance the “soft landing” does happen, then you’ll come out ahead.

Sheltering your savings from the consumer debt crisis

The historic levels of consumer debt are bad news because consumer spending is a critical part of how the U.S. economy operates.

If that spending becomes impossible, which could happen at any time, then some type of recession is inevitable. If that happens, the White House “spin department” will have to operate overtime to explain why the economy fell flat on its face.

The good news is, you can keep your retirement safe through proper diversification. A solid diversification plan could include acquiring some physical precious metals (especially gold and silver).

They have historically served as safe-haven stores of value, preserving wealth during troubling economic times. That’s because precious metals have intrinsic value (based on both their inherent utility as well as supply and demand).

In fact, the price of physical gold in 2023 grew almost 13% overall (beating inflation).

Take back control of your financial future while there is still time. You can get the information you need to consider precious metals in our free kit.

2024, Featured, us debt, us economy