One Trillion
I am a few days late with this weeks post. I could say that most of my mental energy has gone into practicing last weeks post of selective amnesia. The heat in North Texas continues to be in the triple digits and there seems to be no end in sight. In fact the forecast for the next couple days is for even hotter temperatures. Daily reminders make it impossible to "forget" the heat. I was actually busy with drywall and painting at our church. School begins this week and our church has a number of services that support school age children and a number of rooms needed to be upgraded / repaired to support these services. The work needed to be completed this week. I have not been so busy to not keep an eye on what is going on in the world.
The one thing that struck me this past week was the report that credit card debt had exceeded 1 trillion dollars. First off, most people, myself included have no way of comprehending the number 1 trillion. We have no way of putting that amount of money into any kind of framework. I am not even going to try to do that. I don't think the graphic at the top of this post does the number any justice. My youngest daughter taught me to count when she was about 3 years old; "one, two, more, lots". Lets just accept the fact that one trillion is well above "lots".
I first tried to find out exactly how this data point is determined. I was curious about this determination because of our families spending habits. My wife and I decided it was time for a nice vacation. We go on a nice trip every 5 - 6 years. Hawaii in 2017 was our last nice trip. This year we celebrate 40 years of marriage so we planned a very nice vacation. After 40 years being married to me my wife deserves far more than a nice vacation but this is the best I can do. So we have been putting money aside for the trip. Once we had enough money set aside we booked our vacation. We booked hotels, flights and a cruise. We also booked shore excursions and other extras. We did this over about a 3 month time frame. Needless to say our credit card bills were much higher over that 3 month period. We also had a couple car issues within that period as well (nothing major) that was covered from emergency funds. So was our increased spending over this period reflected in this trillion dollars. If our credit card balances were queried at any time they would show a level higher than we usually carry. However since we put the money aside the balance at month end was zero. So I am still left with question has our increased spending contributed to the one trillion figure or since we always paid the balance have we had no effect on the balance.
My second endeavor was to find out exactly what people were using their credit cards for. I would think that this would be a very simple thing to be determined. I did find this breakdown of data from November of 2020 to October of 2021. This data is 2 years old and also stipulates that it is for households that have a average net worth of 1.3 million (median net worth $405 000), so it is hardly representative of the average American household.
I am interested in making sense of all this to protect my retirement savings and investments. I protect it by making sound decisions regarding these savings. I started this weeks review with this CNN post. I thought I would review this article and give my thoughts on how I would make decisions based on the information presented. The post has a video at the top about Biden's student debt proposal. Why have an unrelated video? This is a bit annoying. After the video there is a couple of short paragraphs that put the topic into some perspective. It gives a time frame and also gives figures regarding credit card debt and over all household debt. One nugget of information that I would have liked to see is that $12.01 trillion of the $17.06 trillion household debt is mortgages. This to me means that most of the household debt is relatively secure. The post than has a graph showing credit card debt since 2013. It is nice to see a graph, as they say a picture is worth 1000 words.
The post then takes a pessimistic turn by injecting the rise in interest rates and the effect it will have on households. The post goes on to explain the relationship between the federal funds rate and credit card interest rates. It concludes that paying off credit card debt will be increasingly more difficult as rates rise. The dark turn gets even darker as the post reveals how many people have either removed equity from their homes through remortgages or have raided their retirement 401k's. Home equity and 401k's are vehicles that are supposed to sustain us during retirement. If either is depleted preretirement what will people live on when they retire? The post concludes with the assertion that spending habits will change especially since student loan payments are due to resume soon. In the last section of the article:
“That’s going to be a really big test for an awful lot of Americans,” Schulz said. “People’s budgets are really, really tight. Once those start up, we just don’t know what that’s going to look like.”
When debt piles up, it’ll inevitably force people to rein in their spending even more, Morning Consult’s Baig said.
Consumers already have curtailed spending or dipped into savings to cover expenses that are outside of their budgets, she said.
The "she" is Sofia Baig from Morning Consult and Schulz is Matt Schulz from Lending Tree
Overall it is hard not to get a gloomy feeling. If spending does get curtailed the economy will suffer. As savings get depleted further spending will get curtailed have even more negative affects on the economy. It is difficult to see a "soft landing" in the future. I may have to rethink our short term investment strategies to weather a possible economic downturn. However, what do I know.
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