It’s the holiday season, the time of year that’s filled with seasonal cheer, food, fun, and wildly varying weather patterns until mid-January.
But this year, and probably many years leading up to it, reflects a different time. Investors, creditors, debtors, and borrowers all look to Washington, D.C., with bated breath as the Federal Reserve tries to decide what to do with interest rates.
The general consensus among those who work at the “Fed” is that the economy has become too heated, with growth rates that are unsustainable when compared with wage adjustments and credit levels.
Average wages have grown over the past two decades, to the tune of a national mark hovering just above $60,000 per year. In Louisiana, average salary levels are roughly $9,000 less, around $51,000.
Wages are an extremely important piece of the puzzle. The ability for consumers to afford goods determines many price indexes, and of course most state governments – and the federal government – are leveraged heavily by personal income taxes. Roughly 60 percent-plus each.
Interestingly, however, is the fact that consumer price structure has been heavily influenced by credit during those two decades of wage growth.
After the housing crash in the late 2000s, interest rates plummeted to help spur the market back into shape. It worked, for the most part, but interest rates became so low and credit became so commonplace that borrowing money was … too easy.
Federal debt, for instance, has reached the point where any tip in the economy could cause a tailspin – wherein the country cannot keep up with the note. Student loan debt is more than $1 trillion, with questions arising as to whether a college degree is worth the price of admission.
Credit card debt has also surpassed the $1 trillion mark, which means most Americans are defraying the cost of goods over a period, as opposed to spending cash up front.
The most important statistic in this slew of metrics, however, is corporate debt. The government can print more money and, for a time, will take a ratings hit but probably bounce back. Corporations, however, employ people and provide those wages – through which both local and federal governments function.
Corporate debt has reached $6.3 trillion, a level that suggests that much of the wages paid and “rapid expansion” in many industries is based on costs that have been financed.
Simply, businesses have borrowed money to pay for part of their growth and salaries, and that money is then used to acquire more debt on behalf of their employees.
It’s a vicious cycle and one that the Treasury understands is unsustainable.
Take student loans for instance – combined with state-level programs (See: TOPS) it’s created an artificial increase in the cost of an education that’s not based on real money spent – or real money acquired post-graduation – but the availability of cash from either the state of Louisiana or readily accessible student loans.
Student loans are backed by the government, which itself is doling out billions of dollars to help with state- and local-level infrastructure projects.
Look at the Comite River Diversion Canal, cleaning the Tickfaw, and soon the restoration of the Amite for clues.
That’s just Livingston Parish.
The faster the economy moves, especially when based on “bubble” markets, the harder the fall. The speculation regarding interest rates stems from the fed looking to stay ahead of the curve.
Will they be successful? Hard to say with a bunch of bureaucrats behind the wheel, but something has to be done ahead of the game this time – this isn’t just a housing market, it’s all credit markets.
There’s never been a generation more cognizant of how tough it’s going to be to pay off their student loans, when compared with capitalization of interest and real wages.
How long before we end up in the same situation the occurred in 2007?
Owners simply abandoned their houses – at least that was real property that, in any case, could be purchased by investors on the back end.
An education is not tangible property; there’s no one to track down if students stop paying loans.
What about car finances? Kid gets in a wreck, car’s totaled, insurance won’t pay the amount of the note? How many would take the credit hit just to let the loan default?
These aren’t suggestions or ideas. They’re real-world occurrences every day.
Almost all of these credit markets are intertwined, and if one goes it’s an easy bet that they’ll all go – hence the consideration to raise interest rates, tighten credit, and try to make as much of that debt disappear as possible.
Keep an eye on any federal budgets coming out in the next few weeks and take a look at the borrowing level. Last year the feds borrowed to the limit with a bloated budget – can we the people afford the same thing this year?
Highly unregulated markets will crash hard after fast growth; regulated markets will fall easier but incur slow growth.
Pick your poison.