US household debt

[JackRab]

https://globalnews.ca/news/3329246/canadian-debt-to-income-ratio-cibc/

Canadians are worrying about debt all wrong: CIBC
By Jesse FerrerasNational Online Journalist Global News
THE CANADIAN PRESS/Graeme Roy
Canadian household debt is very high by almost any measure.

One of the most common ways of looking at it is through the debt-to-income ratio, which measures people’s debt against their disposable income.

The latest numbers from Statistics Canada indicate that household debt now stands at 167.3 per cent of disposable income, a record high. This suggests that, on average, Canadians owe $1.67 for every $1 of disposable income.

The debt-to-income ratio is “likely the most quoted economic number out there,” CIBC economist Benjamin Tal said in a report last week.

But how seriously should Canadians take that measure as a cause for concern? Not very, if you ask him.

In a brief report titled, “On the Fallacy of the Debt-to-Income Ratio,” Tal wrote that the debt-to-income ratio is “probably the most useless economic indicator out there.”

> link to report: https://economics.cibccm.com/economicsweb/cds?ID=2490&TYPE=EC_PDF

A couple interesting points about debt-to-income ratio:
- The ratio compares the stock of debt to the flow of income. You are not required to pay off your mortgage in one year, so on that ground, that approach is faulty.
- It’s also the debt of people with debt, relative to the income of people with and without debt. Again a suboptimal comparison.

Now, debt-to-income is not the same as debt-to-GDP... but some things are comparable. Mainly that we're comparing 'the stock of debt vs flow of income'...

 

[Rabbitone]

Where is your chart from? The FRED charts I have seen tell a different story?

https://www.zerohedge.com/news/2018-01-04/debt-beneath

 

[ironchef]

The personal savings rate is plunging to all time lows. There are going to be some real big problems around the corner.

View attachment 182973

Not so sure. Here is a look at global saving by sector (personal, corporate and government):

And the corporate breakdown:

So, for the US, total country saving is not so bad and I think just looking at personal savings can be misleading.

Regards,

 

[JSOP]

I wonder why all the shitty countries are in the lower bottom section... Colombia, Greece, Ireland, Brazil, Russia, ...

First of all, these countries are NOT shitty countries.

Second,

In those countries it's not easy to get unsecured personal loan...

And some of these countries' culture believes more in cash, spending only what you have.

 

[JSOP]

"

https://twitter.com/x/status/966667689048662017

"

Honestly I don't see what's the problem. The current USA household debt is in the upper-left quadrant, high but stable vs before the financial crisis, high and rising which means the debt level is more or less in control.

Moreover, having high debt is NOT necessarily a bad thing. It depends on how you use the debt proceeds. The chart illustrates household debt which could include all different types of loans that were clearly illustrated. If household debt includes investment loans that in turn is invested in investments that's earning returns higher than interest being paid on the entire household debt, then having a high household debt is actually a good thing.

Overall, this chart does NOT tell the whole picture and thus is not indicative of anything.

 

[HobbyTrading]

Honestly I don't see what's the problem. The current USA household debt is in the upper-left quadrant, high but stable vs before the financial crisis, high and rising which means the debt level is more or less in control.

It may currently not be a problem. But it could turn into a problem if the interest rates rise, which is bound to happen in the USA. This may cause households not being able to pay the instalments on their loans. The first signs of this are apparently being reported: recently is the number of missed payments on credit card loans in the USA increasing. If this is true, then it is a worrying development.

 

[JSOP]

It may currently not be a problem. But it could turn into a problem if the interest rates rise, which is bound to happen in the USA. This may cause households not being able to pay the instalments on their loans. The first signs of this are apparently being reported: recently is the number of missed payments on credit card loans in the USA increasing. If this is true, then it is a worrying development.

Yes it is concerning because credit cards are usually used for consumption and not really for investment so there is no way to earn returns on them but its negative effects can still be limited if 1) It remains a relatively small % of the GDP in that allowable credit card limit remains regulated i.e. no credit cards with $100K credit limit and credit cards cannot be used for all purchases and 2) Tight income verification and credit checks in place to prudently confirm ability to pay by the borrower before issuing the credit card i.e. No NINJA credit cards and 3) most importantly nobody is allowed to create derivative products by packaging these credit card loans and selling them and repacking and reselling them over and over and over and over again.

As long as these 3 criteria are met, even in light of rising interest rate, unsecured consumption debt can still be within control and won't balloon into another financial crisis.

 

[JSOP]

It may currently not be a problem. But it could turn into a problem if the interest rates rise, which is bound to happen in the USA. This may cause households not being able to pay the instalments on their loans. The first signs of this are apparently being reported: recently is the number of missed payments on credit card loans in the USA increasing. If this is true, then it is a worrying development.

Alternatively another way to mitigate this problem is actually turn these consumption debt into debt for investment: Allow credit card to be used for investment purposes too but ONLY in GUARANTEED investment like GIC's, T-Bill's and etc. with maturity exactly matching the payment structure on these credit cards. The interest rate doesn't have to be really high but has to be higher to entice people to invest and save money. Of course that would mean banks would have to increase their interest rate and that would cut into their profit which is really the whole purpose of the Fed raising interest, is to slow down the economy.

This way, it would kill 2 birds 1 stone. Decrease consumption debt, increase personal saving and dampening an potentially overheated economy, 3 birds 1 stone. Only if those greedy banks would agree. LOL

 

[HobbyTrading]

@JSOP I am not familiar with mortgages in the USA. What happens if the interest rates go up? Do the monthly payments on mortgages also go up?
If so, this could have a bigger impact on total household debt than outstanding credit on credit cards.

 

[JSOP]

@JSOP I am not familiar with mortgages in the USA. What happens if the interest rates go up? Do the monthly payments on mortgages also go up?
If so, this could have a bigger impact on total household debt than outstanding credit on credit cards.

Your mortgage payments would be adjusted higher when the interest rate goes up. The timing of it would depend on the nature of the mortgage. If it's a variable-rate mortgage, the adjustment would happen faster and if it's a fixed-rate closed mortgage, the adjustment would happen at the time of refinancing the mortgage.

Mortgages are different though because these are really investment debt. The loan proceeds are being used to invest in real estate property which usually appreciate in value over time. So they shouldn't be that worrisome because you are potentially earning returns that's supposedly higher than the interest you are paying so even if the interest rate goes up as a result of the Fed raising rate, if the housing value is going up more, you would still be making positive return UNLESS faced with the collapse of the housing market that happened during 2008 then it would be troubling.

But I find credit card loans or what I would categorize as consumption debt is more troublesome. Because these loans are used to finance consumption goods that's just gone once it's consumed, so you are earning 0 returns and yet you are stuck with the payment of interest. So in essence you are earning -ve returns and that's eroding wealth.