Household Debt Climbs in Q1, Finally Surpasses 2008 Peak

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As of March 31, Americans owed $764 billion on their credit cards. Though the rising debt is not a good sign for the U.S. economy, does not represent the threat to the global financial system that the subprime housing loans did in 2008.

On Wednesday, the Federal Reserve in NY said that total household U.S, debt reached $12.7 trillion, a new high, during the first quarter of 2017, another milestone in the nation’s long and slow recovery of the economy.

“Auto loan and credit card delinquency flows are now trending upwards, and those for student loans remain stubbornly high”, Lee said. Credit card balances fell 1.9 percent this quarter. It was the first time loan balances crossed the 2008 peak of $12.68 trillion. Auto loans accounted for 9.2 percent, up from 6.4 percent.

Although household debt is growing, banks are becoming more cautious about the quality of borrowers they lend to. Total debt (the black line) has just now risen above the old peak, with mortgage debt (the light blue line) still below the old peak (represented here by the value of 1). Prior to the recession, the average US household was leveraged to 100 percent of its worth, meaning most people owed as much money as they had.

“I wish there were a lot less student loan debt out there”, Mike Cagney of San Francisco-based FinTech company SoFi said.

Not surprisingly, the largest components of total debt tend to benefit greatly from government interventions and subsidies.

Auto loans have remained relatively available to subprime borrowers, helping fuel the record vehicle sales of recent years as interest rates have been low.

This quarter saw a notable uptick in credit card debt transitioning into delinquencies, a continued upward trend of auto loans transitioning into serious delinquencies, and student loan transitions into serious delinquencies remaining high. Malinvestments are not totally liquidated, but shift from one sector to another.

Total indebtedness is now 14 percent above the 2013 trough of household deleveraging brought on by the 2007-2009 financial crisis and Great Recession.

The number of loans issued to borrowers with credit scores under 660 shrank, year over year, while the number of loans issued to borrowers with credit scores over 720 increased considerably, according to the report. The share of student loan balances that eventually go unpaid remained at a high annual rate of 10%.

The trouble will come when consumers can no longer keep up with debt payments and money begins to disappear from the fractional-reserve banking system, setting in motion deflation and recession.

Some 4.8% of outstanding debt was delinquent at the end of the first quarter, little changed from late 2016, with 3.4% at least 90 days late, known as seriously delinquent.

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