January 5, 2014

The Number Facing ‘Debt Peril’ Might Rise

Readers suggested a topic on credit. “There have been numerous attempts to compare what has been happening with this credit cycle to other periods in history (in either the US or other countries). The two most prominent theories seem to be: 1. There will be weak inflation, until it’s not longer weak and goes much higher and the Fed won’t be able to stem the tide very well due to the extraordinary efforts that it has made to create money since the crash; or 2. We will similar to Japan, with an extended period of low interest rates and flattish/declining consumer and real estate prices and a stagnant stock market.”

“I’m sure there are other theories as to what happens next, but these seem to be the most prevalent. So, my question for discussion is this: What one piece of data would you look for (and when) that would make any of you conclude that one scenario is more likely and the other less likely? For me, it will be an eye specifically on wages once we reach “full employment” (5-5.5% unemployment).”

“If we reach full employment and there is not wage growth (in excess of other price inflation in the economy) that follows, then I think we can conclude that a combination of globalization and technology will keep typical workers in a ’semi-permanently’ screwed status for a LONG time, and thus we will likely have low rates for a long time like in Japan.”

“However, if following reaching ‘full employment,’ there is the start of wage growth in excess of other price inflation in the economy, that could very well be the catalyst that drives inflation and interest rates higher, making scenario #1 more likely to play out.”

A reply, “We will (be) similar to Japan, with an extended period of low interest rates and flattish/declining consumer and real estate prices and a stagnant stock market. The FED fears deflation like Japan so therefore embraces inflation with its very low interest rates and buying treasuries, mortgages etc. Anyway I think wages will stay low and the stock market and RE market will continue to rise with a result of Stagflation for most Americans.”

“However, if following reaching ‘full employment,’ there is the start of wage growth in excess of other price inflation in the economy, that could very well be the catalyst that drives inflation and interest rates higher, making scenario #1 more likely to play out. No Unions no wage growth, companies will just rely on over working the most productive workers, outsourcing and cutting corners.”

And finally, “Our problem is that the velocity of money has slowed to a crawl. The Fed prints up a fresh batch and buys treasuries, which the government fritters away, but it quickly ends up in investment/savings accounts rather than circulating though the economy. The economic stall warning horn has been sounding for years now. Corruption.”

This is Money UK. “The number of British households spending more than half of their disposable income on debt repayments could TRIPLE by 2018 if rates rise quicker than anticipated, according to The Resolution Foundation, with politicians accused of ignoring the looming crisis. The think-tank’s projections, based on figures from the Office of Budget Responsibility (OBR) which show household debt rising faster than income, lay out several ways in which the number of people facing ‘debt peril’ might rise from 2011’s total of 600,000. But if interest rates go up and growth is slow or unequal, that figure would hit two million.”

“Matthew Whittaker, senior economist at the Resolution Foundation, said: ‘Even if we take a somewhat rosy view of how the economy will develop over the next few years the number of households severely exposed to debt looks as though it will double. Mr Whittaker called the worst case scenario speculative but plausible: if the Government’s Help To Buy scheme created a new housing bubble, or spending increased among the affluent only, interest rates would be driven up without any accompanying recovery.”

“In practice, he said, the number would not actually hit two million. Instead, ‘a high number of people’ would simply default on their debts after a few months, possibly losing their homes, and ‘drop out of the statistics’.”

The Financial Post. “‘People have become so used to interest rates being so low,’ says Craig Alexander, chief economist with Toronto-Dominion Bank. ‘In the past, small moves in bond yields wouldn’t even have been worth mentioning except maybe in small way in the financial press. But it became a big story.’”

“The fear of rising mortgage rates was credited with driving consumers back into the Canadian housing market as many would be buyers jumped ahead with purchases fearing that wouldn’t be able to get the same interest rate later in the year. Some consumers’ fears that they could be wiped out by higher rates are probably just, given debt levels in Canada have never been higher. Statistics Canada said in December the average level of consumer debt to annual income reached 163.7% in the third quarter.”

“Scott Hannah, executive director of the Vancouver-based Credit Counselling Society, doesn’t think that rates are going to rise dramatically in 2014 but nevertheless he feels 2013 may have caused some procrastination from consumers about paying down their debt. ‘We are just not as focused about taking care of our financial picture and we are worried that consumer debt, excluding mortgages, is continuing to rise,’ says Mr. Hannah. ‘We believe in a couple of year’s time there will be increases in interest rates but people aren’t taking action today to address that,” said Mr. Hannah. ‘I think a lot of people can’t comprehend mortgage rates beyond 5%.’”

The Orange County Register. “Changes to loan limits, reductions in the Federal Reserve’s purchases of mortgage-backed securities and treasury bonds and new fees for government-backed loans have some people speculating that the housing market’s in for a rough ride in 2014. The overall plan seems to be to get Freddie and Fannie away from purchasing loans for securitization and sale to investors. The government thinks private capital will come in if Fannie and Freddie rates are increased enough to make it attractive to compete against them.”

“Sally Doherty, a loan officer with Cherry Creek Mortgage said it all seems to be part of the plan that the federal government has to ‘unwind’ Fannie and Freddie and stop securitizing mortgages in favor of letting it be taken over by private entities – but it looks like it will be at a higher cost of mortgages to the consumer. Another factor that could play into 2014’s market is a decision by the U.S. Department of Housing and Urban Development to allow the temporary loan limits that came in as part of the Housing and Economic Recovery Act of 2008 to expire Dec. 31. ‘It’s a complicated issue with many moving parts contributing to the uncertainty present today in the mortgage industry,’ she said.”




Bits Bucket for January 5, 2014

Post off-topic ideas, links, and Craigslist finds here.