We Blew a $4.2 Trillion Debt Bubble – Then 10 Million of Us Lost Our Jobs

Posted in: Market NewsOp-ed
April 7, 2020 10:30 PM UTC

The Federal Reserve's latest consumer credit report shows Americans were borrowing at record levels just as the COVID-19 crisis struck.

  • The latest Federal Reserve consumer credit report released on Tuesday.
  • It shows record levels of outstanding credit in February: $4.2 trillion.
  • With unemployment rocketing, another financial crisis is around the corner.

Total outstanding U.S. consumer credit stood at nearly $4.2 trillion in February. According to the latest consumer credit report from the Federal Reserve, seasonally adjusted consumer borrowing increased by 6.4% in February.

As the economy flails through the worst financial crisis in living memory, consumer credit has become a massive liability to consumers and lenders alike.

Consumer Credit Bubble Creates Great Recession Echo

Just before the 2008 financial crisis, total outstanding consumer credit was a comparatively “paltry” $2.6 trillion.

The U.S. consumer debt bubble just keeps growing larger. | Source: Federal Reserve Bank of St. Louis

Financial legend Warren Buffett once wrote in a 2001 letter to Berkshire Hathaway shareholders:

After all, you only find out who is swimming naked when the tide goes out.

Well, the tide just went out, and the consumer credit data show many were swimming naked.

Americans were borrowing at record levels just before the COVID-19 pandemic rocked the world. At the time, employment and earnings were also soaring at record highs.

“After all, you only find out who is swimming naked when the tide goes out.” -Warren Buffett | Source: AFP PHOTO / NICHOLAS KAMM

The unemployment rate for Americans 20 years and older was at a record low of 3.2% in February. Meanwhile, household income growth was strong in 2019.

The Brookings Institute estimates:

In 2019, the three components of income growth imply a growth of 2.1 percent in median household income for the 2018 to 2019 period, suggesting a rebound from slower growth in 2017 and 2018…

That put U.S. median household income at record levels just before the COVID-19 pandemic and economic crash hit this year.

Sentier Research, a firm headed by former Census Bureau officials, estimates median household income for Dec. 2019 stood at a record-high $65,666.

Consumers could have used that opportunity to shore up their finances and pay down consumer debt. But Americans leveraged their higher earning power to borrow more.

Another Financial Crisis in the Making

With the economy suddenly ground to a halt, and millions of Americans losing their jobs, lenders may find that they are holding a massive pile of toxic consumer credit loans.

And consumers may find they didn’t leave themselves enough borrowing power to weather the economic storm of a lifetime. Further, consumer credit lending is declining, even as financial institutions lend to companies at the fastest rate ever.

Around 10 million Americans filed for unemployment benefits in just two weeks at the end of March. Consumer credit delinquency and charge off rates already hit a seven-year high in last year’s third quarter. That was when the good times were still rolling.

Quarter one and two consumer credit charge offs are liable to spike drastically in this economic winter. Especially since the last decade saw a staggering flow of subprime and deep subprime credit card originations.

Billions of dollars of this outstanding consumer credit is bundled into securities. Banks trade them back and forth in an ominous echo of the pre-2008 financial crisis economy.

Only this time, the damage could be even worse.

Disclaimer: The opinions expressed in this article do not necessarily reflect the views of CCN.com.

This article was edited by Josiah Wilmoth.

Last modified: April 7, 2020 8:30 PM UTC

W. E. Messamore @thehuli

Markets Contributor for CCN living in Nashville, Tennessee. Bachelor of Business Administration from Belmont University in 2009 (majored in Entrepreneurship). Organized Senator Rand Paul's first and second online fundraisers in 2009. Correctly predicted the bitcoin bull market of 2019. Roving editor for the Independent Voter Network since 2013. Email me | Follow Me on Twitter (followed by: fmr Rep. Ron Paul (R-TX), Sen. Rand Paul (R-KY), fmr NM Gov. Gary Johnson, and Rep. Thomas Massie (R-KY))

Show comments