How To Go Bankrupt: Slowly Then Suddenly

In Hemingway’s, “The Sun Also Rises,” one of the characters, Bill, asks his friend, “Mike,” how he went bankrupt. Mike replied, “I had a lot of friends. False friends. Then I had creditors…” This passage from the novel comes to mind when I hear ads during the local sports radio programming from mortgage brokers urging listeners to use a cash-out refi or home equity loan to take care of credit card debt that piled up during the holidays.  Beneath the surface is the message, “c’mon in, the water is fine, go ahead and take on even more debt.”

If in fact the retail sales turn out to be as strong as projected, it’s because the average household has tapped into its savings and used an unusually large amount of credit card debt to fund holiday spending this year:

The chart on the left shows the 13-week annualized percentage change in household credit card debt. The data comes from the Fed. As you can see, the use of credit cards to fund spending has soared. Further compounding potential household financial stress, the personal savings rate in November dropped to 2.9% from 3.2% in October. It’s the lowest personal savings rate since November 2007. November 2007 is one month before an official recession was declared back then.

The 18% spike in credit card debt is perhaps more troubling than the plunge in the savings rate. It’s been theorized that consumers may have used credit cards to “pre-spend” an anticipated savings in taxes from the tax legislation. Unfortunately, the changes to the tax code will be neutral at best for the average middle class household.

Furthermore, borrowing to fund current consumption in the absence of future income growth or capital gains received from monetizing assets (stocks, homes, etc) merely shifts future consumption into the present. If retail sales come in “hot” for Q4 because of strong holiday sales fueled by credit card debt, it will be offset by a steep decline in consumer spending in 2018. This is because the rate at which consumer credit is rising at more than double the rate of growth in wages. The “cherry” on top of this scenario is that there will likely be an acceleration in the rate of credit card and auto loan delinquencies and defaults.  This latter development would a continuation of the rising trend in credit delinquencies and defaults that emerged during 2017.  Mortgage payment problems are sure to follow.

The “feel good about the economy” propaganda has been over-the-top this year.  Trump has been the primary cheerleader as he extols the virtues of a soaring stock market that he labeled “a massive bubble” when he was begging for votes on the campaign trail.  Now he points to the stock market as an indicator that the country is better off since he became president.

In truth, the middle class continues to be hollowed-out from an increasing need to assume more debt in order to maintain its lifestyle. More debt is necessitated by an income level that is not keeping up with the ravages of the inflation that the Government can’t seem to find in its CPI report.  “Middle class”  includes everyone who requires a mortgage to claim “ownership” on their home plus anyone not rich enough to pay for self-enriching legislative policy at the State and Federal levels of Government.  If you fit either of those of those or both,  you are strictly speaking “middle class.”

2018 is going to be a difficult year for most Americans.  I have no idea how much longer the stock market can continue transmitting the illusion that every one is becoming more prosperous.  I have a gut feeling that real inflation, resulting from the inexorable devaluation of the dollar since 1971, will rip through the system sometime in the next year or two and drive interest rates to a level that could bankrupt a major portion of the economy.  It really won’t take much of a bump in rates for this to occur…slowly, then suddenly.

9 thoughts on “How To Go Bankrupt: Slowly Then Suddenly

  1. Americans have been led to believe that debt is wealth. Look
    at all the new cars and restaurants full of people charging dinner
    on debt bloated credit cards. Yes there will be a day of reckoning,
    not if just when. In Texas we have a saying, “all hat, no cattle” that
    sums up these people who are drowning in debt.

  2. ‘Hey bro’ It’s all good.’
    ‘Don’t worry about tomorrow.’
    “Don’t fret that you’re a Dole Geezer dumpster diving behind your BTS single wide in the Manor Farms Mobile Home Park.’
    ‘Just think how good it’s gonna feel buying that POS happy crap on Amazon.con’
    ‘Heck, I’ll even buy you a cuppa joe for your troubles’
    ‘ Hey bro, I’m a little short this week.’
    ‘Can you stand me for a Starbux Haf Caf Mocchachino with a twist?’
    ‘Yeah, that’s my man, you’re a real friend. Just put it on your pay pal account.’
    ‘Hey, did I tell you about the new blockchain IPO I’m into?’
    ‘Man, we can make a million, easy peazy’
    ‘You still some cash left in your IRA?’
    ‘Best get it ‘all in’ before the sharks start swimming’

    This conversation I got while waiting in line for my matinee tickets to Star Wars, The Next Jedi.
    Homie got a quick shiv between the ribs before he STFU and wandered down the line for another gray to prey on. Hell, Ferengi are more ethical. Ditto for my BFF Watto.

  3. Dave, I think the Fed’s ppt is going to get a real workout this year,lol. Shorted your two retail stocks from the latest ssj on Weds, already a nice move,thx.

    1. Awesome. Those two shorts should do well. Just wait til holiday credit card and healthcare bills hit the mailboxes in January. Retail sales will shit the bed.

  4. Folks using their houses as ATMs and robbing their 401(k)s & IRAs has probably played itself out. The brainwashed entitled Americans need to be taken out behind the debt woodshed and be bankrupt clocked. Americans think they can go into debt and never have to re-pay it and that it will be all forgiven in filing for bankruptcy or just ignoring their bills. Americans feels they don’t have to pay their debt just like the U.S. federal Gov’t. Americans and their Federal Gov’t need to be held accountable and and learn their lessons the hard way.

  5. I do retain sympathy for those who, through little or no fault of their own, have been driven into further debt (incl credit cards) just to survive after their rightful means of sustenance through work and fair wages have been stolen from them. (One of the Biblical “sins that cry out to God for vengeance” being to deprive a worker of his just wages.) HOWever, as for those of the working classes who have “pre-spent” their anticipated pennies from the new tax shift, by taking out credit card or mortgage loans as “shadow margin” to speculate on Cryptos? THEY shall deserve the financial sodomisation they have consented to!

    “And they shall cast their silver into the streets”: The Prophet Ezekiel, 580s BC, “same as it ever was!”: https://www.youtube.com/watch?v=I1wg1DNHbNU

  6. Bitcoin: Because when a stripper invites you to put a dollar in her string close to her pussy, you can ALMOST fantasise that she might let you go there all the way! Meanwhile you just HODL onto your own imagination.

  7. 1-2 years? then still time to make money in the marijuana stock mania before she blows…
    last week was unreal, reminded me of the best weeks in crypto

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