Posted on 09/29/2010 6:59:42 AM PDT by blam
The Reason Why Americans' Debt Is Falling Is That People Are Defaulting Like Crazy
Vincent Fernando, CFA
Sep. 29, 2010, 7:16 AM
American households are cutting back their debt so rapidly that debt payments as a percentage of disposable income has hit about a nine-year low. Yet there's more to this national deleveraging than belt-tightening.
Americans are cutting their debt levels due to mass defaults:
Fortune:
Total household debt fell by $77 billion during the three months ending in June, but nearly half of that decline stemmed from bank charge-offs of residential mortgages, credit cards and other consumer loans, according to Capital Economics Group. In a recent report, the London-based economic research consultancy found that this isn't necessarily a new development. Household debt has fallen every quarter since the beginning of 2008, leaving it $473 billion below the peak, which is the equivalent of reducing debt at every household by $4,200.
Here's where it gets strange:
Shedding away debt - however it's done - is critical to the overall health of the economy. But the wave of households de-leveraging by default is worrisome. And many Americans are using their new savings to buy up U.S. Treasuries instead of devoting it all toward paying down debt. During the past year, households bought 42% of the new Treasury debt issued, equal to about $616 billion and far more than the $432 billion absorbed by foreign investors.
This is a typical example of investors' propensity to mentally compartmentalize their financial life into different 'buckets', despite the fact that what ultimately matters is the complete sum of our financial positions.
Thus if you happen to be included in the above, then by all means pay down debt completely before buying U.S. treasuries. Else you're losing money on
[snip]
(Excerpt) Read more at businessinsider.com ...
Does anyone believe that people are doing this? Buying treasuries at 0 to 3% instead of paying off debt 5 to 25%. No way. The only "households" buying treasuries are holding companies in the Cayman Islands.
To the extent that households are defaulting on their debts and socking away some cash rather than paying it on debts that they believe they will never be able to pay off anyway, there is probably some truth to this.
People ARE that stupid. They put Pelosi and Reid in charge of congress and Obama in charge of their healthcare and the American auto industry.
I don't think people are "investing", but rather sticking some money into a mattress (after all buying US government securities is about the same as putting your money into a mattress) while they are simply walking away from debts.
They may not be doing it directly but maybe thru money market funds etc.
Ahh strategic defaults.
I figured the defaulters where those who couldn’t pay their bills and the bond buyers were people with excess cash after making all their minimum payments.
So you make a good point.
But I still doubt most of this household buying is on the up and up.
I don't think Joe Mom and Pop are directly buying treasuries though.
My BIL had a good job, when his hours dropped he lived off his credit cards knowing things would pick back up soon. Two years later he was let go, and had accumulated about $33k in credit card debt.
His wife works, and the unemployment was just enough to make the two mortgages on his home almost exactly, but there was nothing left over after the basic necessities were met like food, insurance, kids clothes and the like.
He knew what was coming so he called both his credit cards and explained he was going to default, gave them the reasons and negotiated with them for a one time lump settlement. He had a whole life policy and was willing to borrow against it, but only if it would clean them up completely. The company representatives refused to negotiate at all, so when he defaulted and it went to the collection agency he gave them the same offer for a lump settlement and they jumped at it.
Paid off Discover card for 33% and his other Visa card for 36%. I know he took a hit on his credit rating but I don’t know how bad. I will say one thing, he learned his lesson, he told my wife and I if we ever hear he applies for another credit card in this life we were to walk over and beat him with a baseball bat.
I have no problem with honoring that commitment...
Bankrupcy is going up....
Gee, I wonder why? Unemployment is at ~10% and going up. We are told by Jughead that this is the new status quo, that this isn’t going to change in the next several years. Funny, Bush got bashed when it was 4.7%. Businesses are terrified because they do not have a clue as to what the tax and healthcare situation will be. They are more prone to layoff, well before there is an economic emergency.
Banks given money to help homeowners, took that taxpayer money and invested it in overseas investments - instead of helping homeowners as they promised. Their punishment? TARP2.
Stock market has crashed. Home values have plummeted.
So, if you lose your job - you are literally screwed. If you had equity in your home, with falling home values it is now evaporated. If you didn’t have equity, and you are laid off - how to do you take another job elsewhere, if you have to pay tens or hundreds of thousands of dollars on your existing home - and that is assuming you can sell it.
And every single case of this can be attributed to Gov’t ineptness. IMHO, the straw that broke the camel’s back wasn’t the sub-prime interest rates... it was when Gasoline hit $5 and people had a choice of filling their car and going to work, or missing a house payment.
Given the choice of going to my job and eating tommorrow - or paying my mortgage, I’ll chose food and a job any day.
Yeah, I think a lot of the bond buyers (at least the ones cited in the article) are probably people who got tired of making their minimum payments and seeing the balance remain the same or even go up so they just decided to quit making their minimum payments and decided to sock away some of the money instead.
I seem to remember a French king who got into debt and was unable to repay the lender. He simply declared the lenders to be apostate heretics and they were destroyed by his religious decree............
Based on the information available at the time, and a lifetime of experience - I believe your BIL made the best decision he could with the information he had.
The only advice I would have given him was to grab $1,000 and retain a Bankrupcy lawyer. The credit card agencies have tons of lawyers operating in their best interest, he should have an expert working on his side.
The truth is that many, many laws are written on behalf of the average citizen, and the credit card companies have no vested interest in informing the creditor of their rights and options.
“Does anyone believe that people are doing this?”
Only when it is part of a 401(k) plan but certainly not $616 billion in voluntary purchases.
so bankruptcy is recorded the same as paying off the debt.
sweet.
It makes sense. Why pay unsecured debt when the law provides for a legal means of eradicating debt with no pay back requirement. (the 2005 effort to force ch 13 plans failed and still leaves unsecured debt as pretty much zero)
Doomed.
I love a story with a happy ending.
the 2005 bankruptcy revision was a canned law written by the banking and credit card industry on the THEORY they could scare people away from bankruptcy via pre-counseling (a 30 minute joke btw) and increasing the means test (again a joke).
Disclaimer: Opinions posted on Free Republic are those of the individual posters and do not necessarily represent the opinion of Free Republic or its management. All materials posted herein are protected by copyright law and the exemption for fair use of copyrighted works.