Monthly Archives: July 2016

Bankruptcy Filings Going Up?

Bankruptcy filings follow, logically, consumer debt.

Bankruptcy Filings Going Up?
Bankruptcy Filings Going Up?

When debt goes up, eventually, Bankruptcy Filings Go up.

Is Consumer Debt Going Up?

Uh, yup.

Consumer borrowing picked up a bit in May from the prior month, but the pace of growth remained well below the surge seen in March, suggesting that consumers are still reluctant to run up their credit cards.

Total consumer credit increased $18.6 billion in May to a seasonally adjusted $2.62 trillion, posting an annual growth rate of 6.2%, the Federal Reserve reported Friday.

I am not sure what happened in March:

Revolving credit, which is mostly made up of credit card loans, increased at an annual rate of 3% in May, compared with a rise of 1.7% in April. Revolving credit soared 13.2% in March.

Nonrevolving credit, which covers loans for education and cars, remains the strength of the report, in part due to easing loan terms for autos.

This category rose at an annual rate of 7.3% in May, up from 5.5% in April but below March’s 8.8% gain.

So What If Consumer Debt Goes Up?

Usually, when debt bumps up, defaults rise.

Keep a Close Eye on Delinquency

What is next? We will have to wait and see to find out what delinquency rates have done in the second quarter. However, it is clear that the tide has turned. It is irrelevant whether the Federal Reserve will hike rates in July or September. Consensus currently says we should expect two more rate hikes this year. If that is true, we can expect delinquency rates to move up further in the coming quarters.

In 2006 it was exactly twelve months after delinquency rates bottomed that the recession began. If the same period applies, we are due for a recession. In the first quarter of the Great Recession in 2008, delinquency rates were only 1.45%. We are already above that level. On the flip side, however, we should not ignore that it took three years of rising delinquency rates before the economy entered into recession in 2001. Credit cycles are not an exact science. Yet the trend is clear and Fed chair Janet Yellen should be terrified about this disturbing development.

The fact that increasing loan delinquency coincides with mountains of debt maturing in 2016 and 2017 is a topic for next time.

Bankruptcy Filings Going Up?

The Von Mises Insitute story excerpted above looks at the Fed increasing rates as triggering more defaults.  Which also makes sense, in that, the more it costs for the same thing, in this case, money, the more defaults  you will get.

Interest rates are the price for renting money.  At zero percent, you will get less defaults than 2%.

Bankruptcy filings are consistent, over time per million dollars of consumer debt.

Combine debt going up, along with the cost of repaying debt, and . . . .

How would your finances look if interest rates rise?

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