Inflation is in the Rear-View Mirror

43 percent of credit card holders carry a balance. Delinquencies are rising. It's a deflationary debt trap.

Revolving Credit Hits New Record High

In December, revolving debt has topped the previous high-water mark of $1.021 trillion set in April of 2008. Debt as of December 2017 (the latest available) is $1.028 trillion.

Relationship Killer

In addition to student loans, credit card debt is another factor holding down home ownership and family formation. Studies show Credit Card Debt is a Relationship Killer.

  • Of all household debts, Americans find credit card debt the most unacceptable in a partner, but credit card balances are creeping higher.
  • About 43 percent off all card holders carry a balance each month according to the American Bankers Association.
  • More than 3 in 4 Americans consider too much card debt a relationship deal breaker, according to personal finance site Finder.com.

Overdue Debt Hits 7-Year High

The Financial Times reports Overdue US Credit Card Debt Hits 7-Year High.

Distressed debt, defined as debt that's at least three month's delinquent, totals $11.9 billion. That's an 11.5% fourth-quarter surge.

​The Financial Times also notes "More Americans are also falling behind on their mortgages, for which problematic debt levels rose 5.2 percent over the same period to $56.7 billion."

Deflationary Debt Trap Setup

These numbers are huge deflationary. When credit expands there is inflation. When credit contracts (think defaults, bankruptcies, mortgage walk-away events), debt deflation occurs.

Here's my definition of inflation: An increase in money supply and credit, with credit marked to market.

Deflation is the opposite: A decrease in money supply and credit, with credit marked to market.

Looking Ahead

  • Credit card delinquencies are priced as if they will be paid back. They won't.
  • As soon as recession hits, defaults and charge-offs will mount. In turn, this will reduce the amounts banks will be willing to lend.
  • Subprime corporations who had been borrowing money quarter after quarter will find they are priced out of the market, unable to roll over their debt.

In a fiat credit-based global setup, this is how the real world works.

Rear-View Mirror Thinking

Those looking for a huge inflation boost fail to understand credit dynamics.

Austrians who only look at money supply keep expecting pent-up inflation. The Monetarists at the Fed (central banks in general), are clueless about the situation they fueled.

Perhaps we get consumer inflation for a quarter or two, but inflation is in the rear view mirror, primarily having impacted asset prices, not consumer prices.

Rising interest rates are already starting to impact the housing market.

The auto market, home supply markets, and consumer credit in general got a temporary housing boost.

What's next won't be pretty, and almost no one sees it coming. They can't. Inflation is in the rear-view mirror.

What economists expect to happen, already has. They don't see it because they do not understand what inflation really is.

Weakening Economy

The economy is weakening and the Fed, fearing inflation is hiking right into it.

Moreover, real median wages have fallen in seven of the last eleven years!

This helps explain the falling savings rate. It certainly does not support consumption.

Debt Deflation Coming Up

I expect another round of asset-based deflation with consumer prices and US treasury yields to follow.

Mike "Mish" Shedlock

Comments
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thimk
thimk

On a more generalized note , the author is exemplifying the boom/ bust cycles caused by central banks application/interpretation of a certain monetary model. The feds counter intuitive tightening during end cycle weakness coupled with increased government deficits will exacerbate the next downturn. I think the feds HAD to start raising rates regardless and they used the specter of inflation as an excuse.

Snow_Dog
Snow_Dog

“Rising interest rates are already starting to impact the housing market.”

Yes, but please recall that :
~ China has decoupled
~ subprime is contained
~ investors holding Bear Stearns stock were told by Cramer that they were safe just days before the share price lost 80% if its value

Powell isn’t hiking anything. Yellen is the only Fed chair who had the balls to rause rates and she was dismissed for it.

Snow_Dog
Snow_Dog

Did Trump’s tax cut passed last December phase out deductibility of HELOCs?

AlexSpencer
AlexSpencer

My folks recently sold into the great housing bubble their house for an amount greater than their entire lifetime wages. For that amount they could purchase a similar house elsewhere at an equally inflated price. I don't think I will do as well in dollars of capital gain on my house with the expected debt deflation coming. However, I believe whatever happens inflation or deflation I should be able to sell my house and buy a similar one at a similar price to what I receive in a sale. Since I need a roof over my head nothing has changed ; 1 house still = 1 house. The key is avoiding buying with a lot of debt.

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