There is also a video going into more detail at the link.
Posted on 05/11/2023 6:24:03 AM PDT by Diana in Wisconsin
This morning’s consumer price index (CPI) print was a slightly better than expected 4.9%, raising hopes that the Fed will be able to stop tightening pretty soon.
But this speculation completely misses the point, which is that when the Fed finally does stop raising rates, monetary conditions will continue to tighten for a long time. And not just in the US, but everywhere. The world is awash in short-term debt that has to be rolled over. With interest rates now at the highest level in a decade, everything that rolls over going forward will do so at a higher rate. Which means rising interest costs — which is the general definition of monetary tightening. Governments will see their deficits rise in line with their higher interest costs and corporations will see their profits shrink, just as if the Fed was still raising rates.
Consumers, meanwhile, will keep putting their day-to-day lives on plastic. In the past year, US credit card debt has soared to a record high of nearly $1 trillion. This isn’t because an exuberant public is buying exotic vacations and hot cars. It’s because strapped families are working multiple jobs and still not covering basic expenses, and resorting to the modern equivalent of loan sharks to feed their kids. And barring a massive increase in wages, it will continue, which means monthly credit card balances charging 20%+ interest will keep rising. This is another example of monetary tightening.
The conclusion: Even if the Fed stops raising rates today, money will get tighter for at least the rest of the year, and sectors that depend on easy money will be brutalized. Commercial real estate and regional banks are obvious problem sectors, and therefore obvious short candidates at the right price. But their stocks are already down, so we’ve missed the easy part of that bet. The home builders, however, are nearing annual highs on the assumption that mortgages will be cheaper and easier to get in the year ahead. Which is highly unlikely.
There is also a video going into more detail at the link.
Here's a novel idea. How about "awash in short-term debt that should be aggressively paid down and eventually paid off." Rolling over in an environment with rising interest rates means simply "paying more interest."
We have no debt, and encourage all we know to have none, including paying off a BIL's remaining mortgage. It irritates lenders.
There are lots of folks who bought their homes in the last few years and are paying mortgages that carry interest rates around 3%.
Paying off a 3% loan early while inflation is north of 6% and bank CDs are being offered above 5% is rarely a good idea.
Only to be caught in a short squeeze and all of your money taken. The stock market is completely crooked. Go there and find out.
The Gestalt of this is that there is no stress when one owes nothing. It is not only about money. Life is larger than monetization.
Major local homebuilder who is on local talk radio says building is down due to various environmental factors.
I think he is talking about commercial debt not consumer debt. You are right to always work to be out of debt, but business and unfortunately government cannot exist without debt.
I enjoy being debt free, too. Less stressful. Other than working tons of OT for what felt like forever, it was easier for me as a single person to get freed. Came to the place of decision and embarked. Families have so many money-sucking sink holes to deal with, I don’t know where they’d begin. But if husband and wife are one in the matter it can be done.
With respect, I think this an assertion but not a fact.
Sometimes a very short term loan to cover with cannot be covered by liquidity is seen, but the smart businesses then pay OFF that rather than roll over such debt. When companies continue to acquire and roll over debt, bankruptcies occur. I participated in one decades ago, when even that company's line of credit was breached. We got in line first, and so got paid. Other lenders were not so lucky.
As to "government cannot exist without debt," this too is an assertion, with exceptions as during the world wars. But given the last decades, the amassing of $31+ trillion is not about bridge loans or temporary needs, but rather a way of life leading to governments being in perpetual debt.
I would sincerely recommend to you some quick search as to the "perpetual bond" and its implications. To me any perpetual bond / debt means enslaving the next generations. Certainly $31+ trillion is now a glittering example.
Best wishes for a future of decreasing debt for all.
“Paying off a 3% loan early while inflation is north of 6% and bank CDs are being offered above 5% is rarely a good idea.”
Back in the early 80’s when mortgages were going north of 10%, banks were offering holders of 5-6% mortgages discounts to pay them off. Also, a lot of those mortgages were assumable, so they actually became a selling feature for your home.
If you think about it, as long as the government can seize your house for nonpayment of taxes, it makes no sense to pay off your low rate fixed mortgage. There are better things to do with your money, and it is not like you would have a guaranteed place to live no matter what.
Plus you are not taking into account that when you get near the end of your mortgage you are paying almost all principal. So, your interest deduction on your federal taxes is almost nothing. That is why I chose to pay off the last $10K I owed on my mortgage. Even though it was at 2.375%.
🙏
“The Gestalt of this is that there is no stress when one owes nothing. It is not only about money. Life is larger than monetization.”
Amen to that! :)
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