As Consumer Participation Weakens, Debt Market Risk Rises

Conclusions

What I expect to happen moving forward is this. Consumers will reach a breaking point when their falling percentage of take home pay meets some equilibrium point with their rising debt levels. Here is why that will must happen eventually.

Mortgage interest levels cannot go much lower, they are already near the lower bound. There is much more room for interest rates to go up, especially given debt saturation levels across all areas of the economy: corporate, national, and personal.

Belief in the solvency of the US government, for example, is clearly being challenged by the yield curve inversion currently going on in most treasury yield pairs. Such an inversion has almost always predicted an economic recession in the US. One would expect a recession to cause an increase in loan defaults, unemployment levels, and therefore eventually also interest rates as economic risk increases.

Rising interest rates would cascade the problems of consumers participating in the economy as well as paying off past debts already incurred.

The credit card companies don’t really have any room to move monthly payments much lower without sacrificing interest incomes needed to sufficiently pay their bills. And any such move would surely damage consumer’s ability to ever move out of debt to their creditors.

The likely coming consumer debt defaults don’t bode well for banks and mortgage lenders.

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