How People Turn into “Debt Slaves?”

Wolf Richter with Jim Goddard on This Week in Money:

The Price of Easy Money, Low Interest Rates, and Debt Bubbles:

After the party, the hangover. Read…  The State of the American Debt Slaves, Q1 2018
 

Would you like to be notified via email when WOLF STREET publishes a new article? Sign up here.

 

  29 comments for “How People Turn into “Debt Slaves?”

  1. Rates
    May 12, 2018 at 5:56 pm

    Here’s how
    1. Create a FOMO environment.
    2. Turn on the money spigot.

    The muppets will do the rest.

    • Maximus Minimus
      May 13, 2018 at 3:57 pm

      That is how they herd lemmings to the cliff. Who is doing the herding? I guess, we are all lemmings, now.

  2. bev kennedy
    May 12, 2018 at 8:11 pm

    The even bigger debt slaves are corporations who went on buying sprees during cheap debt tha now must be repaid

  3. Debt Free
    May 12, 2018 at 10:16 pm

    Question is, how much longer do we have until the singularity of a Minsky moment? I am afraid the slow rise in interest rates, while good for savers, is pushing us in the direction of a collapse in asset prices. The Fed is very timid (and not very confident despite their rhetoric) as shown by its baby step interest rate rises.

    The mortgage market must be especially vulnerable due to its sheer size, the illiquidity of the secured asset, and the way that they are packaged into MBS and owned by many different entities where contagion can spread quickly.

    • MC01
      May 13, 2018 at 5:52 am

      Asset devaluation is one of the targets of the Fed. They showed it by remaining unfazed during the market hiccup we had earlier this year while the ECB, the BNS, the BoJ and the rest of the alphabet soup of central banks turned plunge protection teams ran around desperately trying to avoid even a slight dip.The Fed was proven right and everybody else looked like… let’s just say the dollar is appreciating for a reason.

      As long as this financial asset devaluation happens at a manageable pace and in orderly fashion, the Fed will just plod along like an old Deere diesel engine. Slow but steady: I’ve heard all sorts of numbers thrown around but it seems most of the people I know wouldn’t be surprised to see the present Fed allow stock indexes and bond prices to go down 30-40% over a five years time frame.

      Of course there’s the dual issue of home prices (and especially the closely tied HELOC) and consumer credit.
      As long as problems are confined to the “bottom end” of FICO scores, it’s again very likely the Fed will just keep on plodding along: major banks have been doused with liquidity for many years and if specialized lenders go burst, well that’s just part of their job. Profits may be high, but so are risks: they don’t call it normalization for nothing.

      • Debt Free
        May 13, 2018 at 10:15 am

        John Hussman expects a 60+% decline in the stock market that will erase all gains in excess of T bills back to October 1997. That is his baseline to return to long term valuation, but it could easily over shoot. I don’t have any faith in the Fed and their ability to deflate asset bubbles in a controlled way. To quote Yogi Berra, “In theory there is no difference between theory and practice. In practice there is.” We will see.

        • MC01
          May 13, 2018 at 2:53 pm

          Well, I hope this chap will put his money where his mouth is when the time comes. I still remember “$150/bbl oil by Christmas” in 2008 or “$2,000/oz gold by 2013” headlines from investment newsletters of yore. Mercifully I saw my father blow so much money in similarly dubious “investment opportunities” in my childhood to fall for them.

          Based on what various Fed governors have said since the Yellen Era ended, the asset class they are chiefly concerned with is US commercial real estate, and that’s something which doesn’t get all the attention it deserves apart from here and a few other websites. In fact I think commercial real estate, and retail in particular, is possibly the most “dangerous” asset class worldwide at the moment.
          I heard people say the US were “overmalled” already when I was living in San Diego half a lifetime ago, but the reality is most of the world is overmalled right now: cities like Isfahan, Manila and Bangkok happily boast malls larger than anything in the US and Europe, and large numbers of them to boot.
          Internet sales and other factors are already causing a “mall correction” in some locations, but REIT’s, developers and local governments live in their own little pocket universe and keep on planning and building more mall space.
          In my opinion that party will end well before stock and bond markets start any serious long term correction (if any), and it will be ignored by newsletter editors, analysts and other salesmen masquerading as analysts (see the hilarious still in the Symantec article) until it’s too late for the average retail investor to avoid the heat.

        • Debt Free
          May 13, 2018 at 3:24 pm

          MC01,

          Re: commercial real estate

          Agreed that this is another epic bubble. I believe Wolf has commented several times that commercial real estate loans are concentrated at smaller community and regional banks that the authorities would be more than happy to allow to fail. The rise in interest rates could be especially nasty to commercial real estate since the loans have to be refinanced every few years.

  4. DK
    May 12, 2018 at 10:33 pm

    The odds are good that the interest rates will keep rising until a recession occurs. Then there will be another series of debt defaults as a result. Student loans at $1.5T, housing prices at all-time highs in many metro areas, etc…the US consumer has gotten into record high debt levels. The fall out from this could be of epic proportions.

    • Debt Free
      May 12, 2018 at 10:42 pm

      Good article by John Mauldin on Zero Hedge today: https://www.zerohedge.com/news/2018-05-12/credit-driven-train-crash-part-1

    • Night-Train
      May 13, 2018 at 12:04 am

      Debt is like an addictive drug to susceptible people (actually a lot of people) and our economic system is set up in favor of the pushers. And much like those addicted to hard drugs, more that one trip to the rehab is usually required to get ahead of the habit. Apparently the 2008 rehab experience wasn’t enough, so now we are headed for another go-round.

      Binge spend and wake up in the economic gutter. Almost like it is in someones’ interest that it works that way so often.

      That being said, the individual is still responsible for their financial decisions and actions.

  5. interesting
    May 12, 2018 at 11:34 pm

    How People Turn into “Debt Slaves?”

    slowly at first and then all at once

    • Night-Train
      May 13, 2018 at 12:11 am

      Those are the two ways to go broke according to Hemingway, Twain or F. Scott Fitzgerald. It’s still funny whoever gets the credit. Although you do have to be careful with credit.

      • May 13, 2018 at 12:23 am

        Whoever gets the debit?

        • Night-Train
          May 13, 2018 at 1:29 am

          Depends on which set of books one is looking at. In some outfits, double entry accounting means having two sets of books. :)

  6. Gershon
    May 13, 2018 at 1:14 am

    The Federal Reserve cue card:

    Step 1: Create fake money stealing value from everyone

    Step 2: Loan the fake money to people with interest

    Step 3: Take people’s stuff when they can’t repay the debt

    Step 4: Get government to enforce our fraud

    Step 5: Plunder humanity

  7. Paul
    May 13, 2018 at 2:23 am

    Best to live within your means or you’ll have to get mean with your living.

  8. Cynic
    May 13, 2018 at 7:02 am

    In a declining civilisation, suffering from diminishing returns, infrastructure deterioration, accelerating environmental degradation and a decline – in consequence – of real prosperity, the basic type which the system will tend to produce is the debt slave ‘citizen’, and a highly-indebted, hollowed-out state, covering the decline with borrowing and make-believe.

    All has happened before (although not on this scale) , and it is simply….. inevitable.

    We exist in a theatrical production in which all the scenes have been written and rehearsed long ago. Call it the matrix of Civilisational Delusion.

    The only real choice is with what morality and ethics we choose to live through this decline, and in what state of spirit we end our lives.

    Being a wolf, preying on the meat that still adheres to the bones is a real option, and one which many will take, and not just the bankers.

    Be as innocent as lambs, as wise as serpents…… :)

    • May 14, 2018 at 5:35 pm

      It’s important to remember that’s what all this financial stuff is about: to cover up the fact that all the real stuff is gone. We’re at Peak Everything.

  9. Realist
    May 13, 2018 at 7:24 am

    It is interesting to follow how TPTB try to push people into not using cash ( and they are apparently succeeding doing that, too ). Pyment using your cellphone ( NFC, Apple Pay etc ), small amounts ( 20,- or less ) without pin code simply by showing your card to the terminal, banks pushing for people to use mobile banking with the security code app in the cellphone, too, instead of online banking etc. And the funniest thing is that several banks enter your credit card bill into your online bank in such a way that all that is shown is the minumun amount to pay each month, the user has to change the amount to be paid himself ( and I dare to bet that a lot of people are happy with the minimum amount ). The idea clearly being that this makes people to be running a nice saldo each month allowing the bank / CC Company to charge nice interest.

    And try to buy some furniture or other stuff and pay in full… difficult as they want to push a new CC to you and have you to pay monthly isntallments instead of paying it at once in full, just to name an example.

    No wonder that people turn out becoming debt slaves, the sheeple do loose the feel for money and it is so easy to use credit instead of staying within your means.

    Buying a home requires most ordinary people to take out a mortgage, but buying a car using credit and other consumption on credit …

    • California Bob
      May 13, 2018 at 11:55 am

      re: “… try to buy some furniture or other stuff and pay in full …”

      Why not pay on a no-annual-fee credit card, pay off the card in full every month and redeem the points (or, for my preferred CC, a ‘free’ shopping spree at Costco every year)?

  10. Lee
    May 13, 2018 at 7:28 am

    A recent article talked about RE taxes on property in various states in the USA. It indicated that Illinois had the highest current rates.

    How have RE taxes changed over the years? Yes, they have probably gone up, probably way up, but what were they like say 50 years ago, 40 years ago, etc as a % of the property value? Are ‘specials’ now used more than in the past?

    One thing that was ‘nice’ about Oz is that until recently RE taxes (We call them rates) were reasonable. They aren’t anymore having more than doubled in the last ten years where we live.

    The other thing is that the various government entities and bodies like to o here is stick fees and charges on to the various bills such as RE taxes or water, etc.

    For example, years ago we had some big fires in the state and of course not everybody had fire insurance and the State government ended up forking out lots of money to people to rebuild even though they were not covered.

    So what the state government did was slap a new fire levy on everybody that owns property in the State.

    What was bad about that was if you had fire insurance you already paid into a fund based on the cost of your insurance. That old cost was eliminated, however, the new ‘fire levy’ costs MORE than the old one did – surprise, surprise,surprise – who would have thought!!

    Do the right thing have fire insurance and then end up paying more because a bunch of people didn’t have any.

    Also they have these charges on utility bills (Like ‘specials’ on RE taxes in the USA) for certain things. Like charges for parks. Or drains. Again these are based on the of the house. Funny, but I’ve haven’t much change in the way of parks or drains (????) over the past ten years. In fact I can’t recall seeing one new park around here at all………….

    Finally, another interesting things about all these government charges is that many credit cards no longer give frequent flyer miles on these types of payments.

    • May 13, 2018 at 11:29 am

      Property Taxes are what ended the family farm in the great depression. When Warren Buffet was Arnold Schwarzenegger’s economic adviser, (he dropped him after he won the election) he said that California property taxes are TOO LOW. He cited taxes in NE as being much higher. The notion of taxes and credit seem analogous, credit is a tax on future earnings, and in some cases property taxes can be deferred, and credit expenses taken off your taxes. Credit is in a multi decade bear market, and tax revenues are declining, the result has been a expansion of future earnings (stock values). Hussman’s projections for the stock market might as well be a prediction of a turn in the credit markets. Credit can become worth more if the need for credit is compelling, or credit is in short supply,

      • Dan Romig
        May 13, 2018 at 4:58 pm

        For what it’s worth: 1/2 of my property taxes are due this Tuesday, 15 May, and on my south Minneapolis home, they’re 1.36% of a ‘taxable value’ per year.

        In Illinois, the median property tax rate is 2.67%. That percent does put things in perspective. The Chicago Fed has had some interesting things to say about this via a proposal for a 1% “special property assessment for 30 years.”

        • Lee
          May 13, 2018 at 6:57 pm

          Here each ‘city’ or shire has their own method of payment. In our city we can pay in four equal installments or in one lump sum payment.

          The bill comes in July and if you pay in installments the payments start in September and if a lump sum you pay in full in February. The city used to run raffles to get people to pay in full.

          I can hardly wait to see how much they go up this year – probably the max limit which is now tied to inflation plus whatever increase in value of the house they guesstimate.

          The State government here was forced to place a limit on how much rates could increase each year as some entities were increasing rates by ridiculous amounts of 10%, 20% or even more each year.

          But don’t worry, they still manage to get around that by increasing other fees and charges such as dog licenses, building permits, or parking fines. The big one this year will a huge increase in the cost of garbage service.

          Those parking fines are a gold mine for cities. One place actually tore up the streets and placed electronic sensors in every parking spot in the shopping area so they could raise revenue. Then they placed 2 hour limits on all streets within a 20 minute walk as well. Don’t know exactly, but I think the fine is something like A$75………

          Other places that have huge property values have RE taxes that are usually paid on a monthly basis.

          What is interesting is that as we have had a huge property boom here both in terms of value and the number of houses, the rates (taxes) continue to go up.

          However, the roads are just as bad, the sidewalks are cracked, raised, and in poor repair and have been for as long as I’ve been here. (Believe it or not many streets around me have no sidewalks or gutters or only sidewalks on one side of the street and these are places with houses valued in the millions of dollars.)

          Usually the city does a quick fix – it grinds down the sidewalk to make it level or slaps some asphalt on the cracks and then ignores it for years.

          No new parks in the area and no real improvements – oh we did get a new bench in the local park to replace the wooden one that had been rotting away for the past 9 years!!!

          By the way, the person that ‘runs’ the city (not the Mayor) pulls in around A$400,000 a year or so. City population is around 325,000 to 340,000 people.

        • juanfo
          May 14, 2018 at 11:31 am

          Here property taxes went up with the housing bubble last decade. Then the bubble burst and they’re still raising taxes. Right now I could buy a lot for $100000. Spend $50000 to build a decent house on it, quality materials. Then turn around and it could take half a decade to sell it for less than $50000. The banks are loaded with properties. Most they don’t even have on the market to maintain the “value” of properties. You recognize the bank houses because they are gutted, stripped, abandoned and invaded by foreign squatters. It is funny, weird and sad. I get emails from the bank fire selling properties for a tenth of the original loan. I know the amounts because these people who owned these homes were my neighbors and friends, small town. The bank manager lets me in on the inside information. He knows I hold stacks which is uncommon around here and respects that. Down here there is only depression. There has been no recovery or growth. Everyone I know is drowning in debt. Kids load up new credit cards on their 18th bday and spiral out of control from there selling their souls for clothes, vacations, cars and partying. Ooh that good life.

  11. mark
    May 13, 2018 at 8:39 am

    No need to worry …. our unelected private bankers (The Fed) and the unelected FOMC surely have all of our best interests at heart

  12. raxadian
    May 13, 2018 at 12:25 pm

    If you need credit to reach the end of the month, you lose. Is as simple as thar.

  13. Lee
    May 14, 2018 at 6:55 pm

    IMO property taxes are a kind of perpetual debt owed to the government. You can never pay it off and the government can increase the amount or add on to the debt for whatever reason it wants.

    If you own RE you are in debt to the government for as long as you own the property.

    Here in Oz, vacant land gets taxed at a higher rate than improved land.

    There are very few vacant blocks of land in the area in where I live and even fewer ones that have a price history of buying and selling.

    I did some checking and found one lot that has been vacant since it was subdivided many moons ago.

    It is a small corner block of land and steep so the construction costs would be much higher than for a level block.

    And as a result of the small size it can not be sub-dived either.

    The size is 656 square meters. The price history:

    2001 A$105,000
    2005 A$172,000
    2006 A$182,500
    2016 A$392,000
    2018 A$500,000

    The price has gone from $A160 per square meter in 2001 to A$762 per square meter in 18 years.

    That works out to a compounded rate of return of just over 10% a year had the original owner kept it minus of course the holding and upkeep costs.

    What is interesting is that the rate of growth for what I consider an ‘inferior’ piece of land is actually higher than for most houses in the area.

    The person that did the flip in 2005 to 2006 probably lost money after tax and transactions costs too.

    Vacant land closer to the village will sell for for between A$1100 and A$1500 per square meter and most of this land is as a result of a house either being knocked down or a lot being subdivided.

    The value of land here has gone up so much in our area that there really isn’t much value assigned to the house anymore unless it is unique in some respect or filled with super, high class luxury appliances.

    So a quick estimate of a house’s value here is just to take the size of the land and multiply it by a factor based on how far away it is from the village area. The above property is about 2.2 – 2.5 kilometers from the village.

    So in many respects Australia has become like Japan – only ‘land’ has any real value.

Comments are closed.