Go Ahead, Pile on the Debt! Have We Reached a “Tipping Point”?

Perhaps you have read the book by Malcolm Gladwell called The Tipping Point.  If you have not, it is worth a read.  There is a lot in it despite being a pretty short read.  In summary, Gladwell points out a number of phenomena that can be traced back to a single, often simple, cause which in turn caused a much larger, and often very drastic, change.  I am oversimplifying a bit, but watching world events, financial market behaviors, and ongoing trade wars and political conflicts, I wonder if we are about to reach a significant “Tipping Point” for the American economy and perhaps the world?

I know that is a broad suggestion, and one that is often associated with being a ‘Debbie Downer’ these days.  Yes, the economy continues to be robust.  Employment is at all-time highs.  New job creation continues apace with wages increasing.  Consumer sentiment is strong and the economy growing. 

Yet I can’t get the enormous amount of consumer debt off my mind.  It hangs like a storm cloud over an otherwise pretty rosy financial picture.  As we all know, though, roses have thorns and sometimes that light we see at the end of the tunnel turns out to be a freight train!

Once again, we find ourselves at record levels of consumer debt.  The New York Federal Reserve just published its report for the second quarter of 2019, and it continues to show that we still seem to have no end to our appetite for personal debt accumulation (read the press release here). 

No surprise, we set yet another record!

Some highlights of this quarter’s report are:

  • The headline from the Fed is “Total Household Debt Climbs for 20th Straight Quarter…”
  • Household debt now stands at a whopping $13.86 trillion.
  • This is a $192 billion increase from the first quarter.
  • The report points out that “Balances have been steadily rising for five years and in aggregate are now $1.2 trillion higher, in nominal terms, than the previous peak (2008Q3) of $12.68 trillion. Overall household debt is now 24.3% above the 2013Q2 trough.”
  • Mortgage related debt stood at $9.4 trillion, a $162 billion increase.
  • Non-housing debt increased by $37 billion in the second quarter
    • New auto loans totaled $155 billion, a $17 billion increase   
    • Credit card balances totaled $868 billion, a $20 billion increase
    • Some good news was that there was an offsetting $8 billion decline in student loan debt.
  • Credit card balances in the 90+ day delinquency range rose to 5.2% from 5.0%.

Unfortunately, an increasingly important part of this debt is from so called ‘shadow banking’ institutions and should cause concern as well.  Consumers that may otherwise not qualify for credit from traditional sources often turn to these institutions to finance their purchases.  That does not help stabilize the debt picture, however.   

Granted, as long as employment stays strong and wages continue to rise consumers can continue to finance their debts.  

Most recently, however, the bond market began to flash warning signals of a potential recession.  Of course, that can force companies to tighten their belts, cause static or negative job and wage growth, which in turn can cause significant financial turmoil.  With little savings, or other financial cushions, to protect consumers during hard times (which surely will come) the “Tipping Point” represented by personal debt will continue to shadow us for a long time.

What can you do now to protect your business?  First, as we have previously suggested, make sure to review your credit policies and stay on top of your receivables.  Make sure that your customer records are as complete and accurate as possible. Finally, make sure to turn your delinquents over as soon as possible for prompt and efficient collections action.  We are here to help.  Let the professionals at A. Alliance show you how. 

A. Alliance Collection Agency, Inc. is a full service, licensed accounts receivable management and debt collection agency providing highly effective, customized one on one management and recovery solutions for our business partners.  Founded in northern Illinois in 2005, we have been proudly improving the bottom-line on behalf of our business partners in and around Chicagoland for over 14 years.

Shadow Banking: Is the Serpent Back in the Garden?

Not five minutes ago I received an email titled: “Personal Loans Trusted Lenders Ready to Lend up to $35,000…”

This was the fifth or sixth email of this nature I have received just this morning.  Of course, most of these are spam, filled with malware or links to nefarious sites that will do great damage to my computing devices.  I hope it goes without saying you should always check the validity of any email address and do not click on anything even remotely suspicious.

Yet some of these, it turns out, are quite legitimate from basically legitimate lenders.  No, not banks.  But lenders of a different sort in an industry that has come to be known as “Shadow Banking.”

Recently, Lisa Brammer and I have been writing a lot about financial literacy and doing the right things to manage our finances and debt.  I think this one should go under the general heading of ‘buyer beware’ or ‘if it seems too good to be true it probably is’. 

Shadow Banking is not really new, and previously has had pronounced, and downright insidious effects on the economy.  Those of you who recall our last economic recession know that it was principally caused by the subprime mortgage crisis in 2007-2008.  In fact, our recession led to a worldwide recession from which we have only recently recovered.  Shadow Banking was a source of many of these so-called subprime loans.  Perhaps you thought that was the last we would have heard of this ‘serpent’ in the financial garden.  Think again. 

Shadow Banking has once again grown to be a huge source of competitive lending offering low rates and quick cash for everything from home mortgages to auto loans.

According to Wikipedia “The shadow banking system is a term for the collection of non-bank financial intermediaries that provide services similar to traditional commercial banks but outside normal banking regulations. (emphasis added)”

That last is an important caveat.

Wikipedia goes on to add “The phrase ‘shadow banking’ contains the pejorative connotation of back alley loan sharks. Many in the financial services industry find this phrase offensive and prefer the euphemism ‘market-based finance’.”

No less an authority than former US Federal Reserve Chair Ben Bernanke defined Shadow Banking further in November 2013:  “Shadow banking, as usually defined, comprises a diverse set of institutions and markets that, collectively, carry out traditional banking functions — but do so outside, or in ways only loosely linked to, the traditional system of regulated depository institutions. Examples of important components of the shadow banking system include securitization vehicles, asset-backed commercial paper [ABCP] conduits, money market funds, markets for repurchase agreements, investment banks, and mortgage companies.”

The long and short of it is while they may look like banks, act like banks, lend money like banks they are not banks.  While they have become subject to some level of regulation, they certainly don’t provide safeguards for your money as do traditional banks and the Federal Deposit Insurance Corporation (FDIC).

Yet the industry has once again become huge.  Like $52 trillion huge.

In an article posted on CNBC.com (“Shadow banking is now a $52 trillion industry, posing a big risk to the financial system” read the article here), reporter Jeff Cox says this is a 75% increase since the last financial crisis of 2007/2008. 

“Nonbank lending, an industry that played a central role in the financial crisis, has been expanding rapidly and is still posing risks should credit conditions deteriorate” writes Cox. “…these institutions helped fuel the crisis by providing lending to underqualified borrowers and by financing some of the exotic investment instruments that collapsed when subprime mortgages fell apart.”

Cox continues: “The U.S. still makes up the biggest part of the sector with 29% or $15 trillion in assets, though its share of the global pie has fallen. China has seen particularly strong growth, with its $8 trillion in assets good for 16% of the total share.”

Quoting no less an authority than J.P. Morgan Chase CEO Jamie Dimon (from his annual letter to investors) “The growth in non-bank mortgage lending, student lending, leveraged lending and some consumer lending is accelerating and needs to be assiduously monitored,”

Additionally DBRS, a bond rating agency, said: “The exposure of the global financial system to risk from shadow banking is growing…Weaknesses in these shadow banks arising from these activities could result in runs that could instigate or exacerbate financial market stress.”

To be fair, the industry says that they provide an important function to the economy by providing access to loans and other financial instruments that can help those who cannot qualify for traditional loans.  Perhaps so. 

Yet, according to Cox, “DBRS identified three specific risks that shadow banks pose under times of market stress: That they are ‘not structured’ to deal with periods of low liquidity and heavy withdrawals; a lack of experience in dealing with periods of weakening credit conditions, and a lack of earnings diversification that would hurt them when parts of the markets deteriorate.”

So, some word salad there, but the bottom line is that consumer debt has grown to historic proportions once again and any volatility in the economy could create a tipping point we can’t recover from very easily.  Shadow Banks are not equipped to handle sudden reversals in revenue inflows.  Perhaps making this even worse is the fact that this just does not apply to mortgages, the industry has expanded to student loans, auto loans and other consumer credit instruments so the impact could be even more widespread should conditions suddenly change. 

So, is the serpent back in the garden?  Perhaps; perhaps not. Yet the hissing is unmistakable.

A. Alliance Collection Agency, Inc. is a full service, licensed accounts receivable management and debt collection agency providing highly effective, customized one on one management and recovery solutions for our business partners.  Founded in northern Illinois in 2005, we have been proudly improving the bottom-line on behalf of our business partners in and around Chicagoland for over 14 years.

image provided by: wikimedia.org

What’s Causing Record Household Debt in America? Financial Illiteracy?

Collectively, we as Americans owe a record amount of money—over 13.5 trillion dollars. Yikes!  If you’ve read any of our recent blogs you already know this. But what you might not know is that the recent report by The New York Fed (Mark talked about in last week’s blog) says that while the amount of debt is higher than before the great recession it’s not as risky this time around because things are different. Phew!

Debt in of itself isn’t a bad thing. It can be good when it allows us to buy a house, a car or a college degree we could not otherwise afford.  But it’s important to keep a good handle on our finances to not only understand what’s coming in versus what’s going out and the ability maintain a good balance of both. We also need to be able to understand basic financial concepts like risk diversification, inflation, interest and compounding interest.

Right now our economy is booming with unemployment at a fifty-year low and wages rising. You’d think we’d be having a field day getting our finances in order wouldn’t you? But according to a recent survey by Bankrate that’s not the case at all. We are actually marching in the opposite direction. (That’s why Mark and I keep writing about this topic!)

For example, this year’s report found only 44 percent of households surveyed have more money in emergency savings than the amount they owe in credit card debt. I can shine a brighter light on that 44 percent by telling you it is 14 points lower than last year’s 58 percent and the lowest percentage in Bankrate’s nine year history of conducting this survey. To make matters worse these numbers probably won’t be getting better soon because according to the same report only 43 percent of those surveyed said they were focusing on boosting their emergency savings this year, down from 53 percent last year. Uh Oh!

A couple of months ago I read an article in investmentnews.com called, “Financial Literacy: An Epic Fail in America.” The title pretty much says it all.  The article talks about a 23-year-old graduating senior at a Texas university who was starting his first post-graduation position when he had the rude realization that he had to begin paying back his $90,000 worth of loans and what that really meant in monthly payments—about half of his new monthly salary. This student made it through all those years of schooling plus four additional years of higher learning yet he had no idea what he had gotten himself into.

Sadly this is not an isolated event and many Americans (as well as many people world-wide) struggle with financial literacy. It begs the question: Are students learning enough about how to manage their money?

The Center for Financial Literacy at Champlain College doesn’t think so.  Established in 2010 the center was designed to promote and develop financial literacy skills in k-12 pupils as well as college students, teachers and other adults. In 2017 the center graded each of the states on a National Report Card on Financial Literacy. Sadly only five states received an “A”. 

Wisconsin, where I live, scored an “F” on that report.  That’s probably what prompted then-Governor Scott Walker to sign a bill requiring school districts to incorporate personal finance into k-12 instruction.

With these types of statistics trending like they are, it’s easy to see how many Americans—even in a good economy—are struggling to keep up with their debt. We need to educate ourselves and our youth on financial literacy now! If not, I don’t want to even think about what’s going to happen when our economy takes a tumble.

A. Alliance Collection Agency, Inc. is a full service, licensed accounts receivable management and debt collection agency providing highly effective, customized one on one management and recovery solutions for our business partners.  Founded in northern Illinois in 2005, we have been proudly improving the bottom-line on behalf of our business partners in and around Chicagoland for over 14 years.