re: What is holding this economy together, I don't get it?

I want to say once student loan repayment begins in October, we will see the millennials and whatever the next generation is (Alpha, Z, idk) struggle. However, I’m sure there’s more kick the can options to exploit.

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How are we not looking at a credit crisis?

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As udtiger said, many are simply whistling past the graveyard. They are hoping they make it beyond the graveyard before they are forced to acknowledge the graveyard is even there.

The problem is that this is a fricking massive graveyard and eventually this road leads through it. By that time it will be too late to avoid and suddenly there will be news stories and message board posts asking "why didn't we see this sooner" and "what were some of the signals we missed". Everything is there for them to see now, they just choose to hope that ignoring it will make it go away.

For those like TheFonz who may not know what indicators they should be looking at to determine these things, here are a few:

The Inverted Yield Curve:
The yields being measured are the rates of return on two different US securities (ie: the federal debt people buy), the only difference between these two securities is the time til they mature. Generally we look at the 2-year versus the 10-year and compare what interest rate they are giving.

Why? Because the more demand there is for a given security, the less the interest rate is (think supply vs demand). There's an adverse relationship here because as one goes down, the other goes up.

Why again? Because these securities have extremely low risk, thus they normally have extremely low returns. In a normal economy investors go with the shorter duration securities in order to make at least a little something (as part of a balanced, diversified portfolio). The longer-term securities mean that money is tied up for a longer period, so they have to offer more of a return (interest rate) in order to attract buyers/investors. Investors usually want a quick return so they can turn around and re-invest that money again, so the 10-year is usually offering rates above the 2-year.

When that flips, it's called an "inversion". Something going on in the economy and/or market has begun to spook investors so they begin gobbling up 10-year securities while leaving 2-years alone. This pushes the returns on 10-years down while pushing the returns of 2-years up.

How accurate is this? Since the 2-year has been tracked, an inversion has preceded every single recession by approximately 12-18 months (tip: for the purposes of this graph, the red line being higher than the blue line is bad).



You can't see it on that graph, but if the theory holds true we should start hitting a recession around December/January.

Another thing you can follow (and add to the inverted yield curve information) is credit card debt.



That screengrab is a little old, but you can see how the slope of the rate of debt accumulation has rapidly increased since 2021. It's still increasing. When looking at it against inflation and average rate of pay, we can safely assume that the rate of borrowing is increasing because consumers aren't willing to change their lifestyles all that much in the face of rising prices (so they borrow to make up the difference).

You can also add to that, credit card delinquencies, which are now higher than any other time over the last decade (the last time it was this high was in 2012 when we were still coming off the recession from the housing crash), and that is trending sharply upward at a rate we haven't been near since the lead-up to the housing crash of 2008-2009. Another point on this to consider is that interest rates on those credit cards has spiked as well. This means those people trying to maintain their lifestyles on the backs of their credit cards are now accruing more debt even faster.

And then finally, we can look at the Dollar (USD) and how too much of it in the economy can be a bad thing.

The USD is a fiat currency, meaning its value isn't tied to a good (like when we were on the gold standard and the USD was fixed to gold at $35/oz). The value of our USD is based on the desirability of it as a medium of trade (it's by far the primary world reserve currency) and an extension of that is how valuable is our debt (those securities I mentioned earlier). One aspect many ignore, gloss over or just take for granted is that the value of the USD also depends on simple supply and demand: how many of them are out there versus how many are demanded.

An apt analogy comes from the late, great Walter E. Williams:

Let's say you are starving as you walk down a deserted road. I'm not talking about "I missed second breakfast" but "I haven't eaten in two weeks and my body is likely to start shutting organs down if I don't eat something very soon." I mean starving.

In the distance you see a sign, it's sitting next to a brand, new building. The sign says "ALL YOU CAN EAT BURGER BUFFET! $1.00!" For a moment you think you are saved, but then realize you don't have even a penny on you. As you sink back into hunger-fueled depression you notice a slightly torn and much dirtied Dollar on the side of the road. At that moment, how valuable to you is that beat-up, dirty roadside Dollar? Pretty valuable, I would wager. It literally represents life to you.

Now consider that same scenario, but that instead of being broke you are pulling a wagonload of Dollars. In this scenario, how valuable to you is that roadside Dollar? I would bet it's not nearly as valuable to you as in the prior scenario. Would you even bother to stop and pick it up?

The differences in the value of that Dollar to you between the two scenarios is the inflationary impact of having too many Dollars in the economy. In 2020 we saw the federal government inject somewhere around $2T within just a couple of months (PPP, stimmy checks, etc). The Fed has raised rates in an attempt to drain as much of that out as possible, but the federal government seems hell-bent on continuing to shove money into the economy (although not as brashly as 2020). This means that while the Fed has been raising rates to bring down inflation, the federal government has been counteracting it (to an extent).

Along with that, the more debt the federal government creates, the less attractive it eventually becomes to investors as the question becomes "what will it take for the federal government to pay just the interest on that debt". For FY2023 that answer will likely be well over $1T. As you can see in that graph, the amount needed to service the debt has already nearly doubled since 2020 and will likely be at/over 2x by the end of FY2023. The big issue here is that the federal government is subject to higher interest rates as well so we are now looking at annual deficits of well over $1T each year with servicing amounts well over $1T as well. The more we borrow, the more we need to borrow just to pay the interest on what we've borrowed.

Math doesn't care about whistling nor graveyards, it simply does its thing and its thing in this environment is a debt spiral that ends only badly.

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credit cards

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Yep. Consumer debt is at all time highs. People's spending behavior hasn't changed all that much; they've just been bridging the widening gap with credit.

During inflationary periods, you also have what's called "demand pull." (People buy now, knowing prices will be higher later.) They're using credit for that too.

That's why it's hilarious to hear people talk about how good the economy is doing and using consumer confidence/spending as an example. It's actually a very bad thing.

There isn't much room left in consumer credit, so there's going to be a sudden stop at some point. With each kick, the can goes less far down the road.

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Uh...the 2008 crisis and resulting recession?

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Well, we Keynesian’d ourself out of that pretty quickly which will result in an even worse economic downturn shortly.

It might be the comparison with the economies of other big nations. I keep up with a lot of foreign news. They are in worse shape than us because they are even more left wing with bigger debts and stupider govt programs.

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Prices out of control for 2+yrs, supplemental covid $$$ ended, housing at worst levels in 20yrs, credit debt at all time high, wages under inflation, etc..

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It's like AOC designed an economy.

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So what will we see with the credit crisis. Eventually companies will stop issuing a credit and ask for payment? Then we will see rapid default across the country?

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Not 100% sure, but I believe defaults are already high and climbing.

Consumer spending will certainly slow if the combination of unchanged behavior and demand pull can't be sustained with debt.

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Besides being in world war 3 I don’t know how you can make that statement

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You know exactly why.

Older generation lives in a fantasy land where they think nothing has changed over the last 40-50 years.

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They all know they jig is up and the end is near, so they figure they’ll go out in a blaze of glory.

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What’s the point of saving during a period of high inflation? Inflation destroys the value of your dollar, meaning it’s never going to be worth more than it is right now. Inflation also eats away at debt.

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Yeah man Millennials have seen more shite than any generation since the greatest generation

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thanks to your evil folks