Your Credit Card Will Pay for the Next Recession

["Dave Farber" <farber () gmail com>]

Begin forwarded message:

> From: Dewayne Hendricks <dewayne () warpspeed com>
> Date: July 2, 2018 at 5:58:14 PM GMT+9
> To: Multiple recipients of Dewayne-Net <dewayne-net () warpspeed com>
> Subject: [Dewayne-Net] Your Credit Card Will Pay for the Next Recession
> Reply-To: dewayne-net () warpspeed com
>
> Your Credit Card Will Pay for the Next Recession
> By The Editorial Board
> Jul 1 2018
> <https://www.nytimes.com/2018/07/01/opinion/credit-card-recession.html>
>
> Every three months, a select group of Federal Reserve officials gets together to guess where the federal funds rate 
> is headed. That’s the interest rate banks charge one another for overnight loans. It’s important because it’s an 
> economic cue ball, creating a knock-on effect for other interest rates.
>
> The Fed forecasters’ median prediction is that the federal funds rate is headed to 3.4 percent by the end of 2020 
> from the current 1.9 percent. This means you’ll be paying more to get a mortgage, a new-car loan or to carry a 
> balance on your credit card. How much more? Possibly enough to absorb whatever extra income you might be enjoying 
> from lower tax rates or higher wages.
>
> The Fed is picking our pockets because, to prevent the economy from overheating, it is legally required to keep 
> inflation in check by raising rates. But the task has been made more urgent by the Republicans’ $1.5 trillion tax 
> giveaway to the wealthy and corporations, which effectively threw gasoline onto a very hot barbecue.
>
> “It makes the Fed’s job more difficult all around because what you’re getting is a stimulus at the very wrong 
> moment,” a noted former Federal Reserve chairman, Ben Bernanke, said in a recent appearance at the American 
> Enterprise Institute. Economists at the Fed would never have chosen such a policy. But in the G.O.P., tax cuts aren’t 
> so much science as they are theology, even if the faithful have to be sacrificed.
>
> Trump supporters who benefited the least from the Republican tax cut — wage workers, farmers and anyone else not in 
> the top 10 percent of earners — will now have to pay the bulk of the bill to mitigate the damage it caused to the 
> economy.
>
> You can see this in credit card debt, which has crested at $1 trillion, now at an average interest rate of about 16.8 
> percent. Credit card interest rates are tied to the prime rate, which is tied to — you guessed it — the federal funds 
> rate. Chase, for instance, adds from 11.74 percent to 20.49 percent to the prime rate, creating a maximum credit card 
> rate of 29.99 percent. For those consumers who carry a balance (about a third don’t), and a card that automatically 
> adjusts (not all do), the difference can mean hundreds of dollars in extra interest costs annually. In one 2016 
> study, the credit reporting company TransUnion said rising rates affect 92 million consumers, 9.3 million of them 
> severely.
>
> And now rates are now rising at time when household debt reached a record $13.21 trillion in the first quarter. 
> Household debt service payments as a percentage of disposable income hit 5.9 percent in the first quarter, according 
> to the Federal Reserve, a figure not reached since just before the Great Recession. Average credit card debt per 
> borrower is about $5,700 and growing at a rate of 4.7 percent while wages are growing at about 3 percent. That can’t 
> continue forever.
>
> There’s an anomaly in an economy that is supposedly running flat out: Many families still haven’t recovered the 
> wealth they lost in the financial collapse. A sobering analysis by Deutsche Bank concludes that more families than 
> ever have zero or negative wealth, excluding their homes. (Home ownership has fallen to 64.2 percent of households, 
> from a peak of 69 percent in 2004.) Despite high stock prices and record home prices, household net worth since 2007 
> has decreased for all income groups — except the top 10 percent. Net worth for the richest Americans is up an average 
> of 27 percent. For the middle class, what remains of it, wealth has decreased 20 percent to 30 percent in real terms 
> — their share of the pie has shrunk.
>
> Similarly, a recent St. Louis Fed study of generational wealth concluded that the very families whose wealth should 
> be growing are falling behind. “We believe many families in the youngest cohort we studied here — respondents born in 
> the 1980s — are at substantial risk of accumulating less wealth over their life spans than the members of previous 
> generations,” the report said.
>
> That’s an astonishing conclusion in an economy that, as President Trump insists, has never been better. Certainly, 
> it’s never been better for the wealthiest 10 percent of families, who now own about 75 percent of the nation’s total 
> household wealth, as opposed to less than 35 percent in the 1970s. Or for the nation’s richest 0.1 percent, who now 
> own as much wealth as the bottom 90 percent, according to Deutsche Bank. For the other 90 percent, the ability to 
> build wealth rests on the ability to save, which they can’t do if interest rates are rising and eating into their 
> earnings. The personal savings rate, at 2.8 percent, is heading in the wrong direction.
>
> Raising rates now, perversely, gives the Fed a monetary tool with which they would be able to fight the next 
> recession — by cutting those rates. And that may come sooner than expected. By 2020, when Mr. Bernanke believes any 
> stimulative effect of the tax cuts will have run its course, we will be facing what he called a Wile E. Coyote 
> economy, after that overeager cartoon character.
>
> The overstimulated American economy will run off the cliff on its own momentum, Mr. Bernanke fears. That will leave 
> the nation with an enormous federal deficit and not much fiscal room to maneuver. Having been essentially made to pay 
> for the tax cuts for the richest Americans, the rest of the nation will be staring down the abyss, too.



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