Are Debt-Laden American Consumers About To Get Crushed By Higher Interest Rates?

Tyler Durden's picture

American consumers love debt, wall street loves securitizing that debt and collecting massive fees for selling it and pension funds, with no viable alternative investments courtesy of accommodative Fed policies, love buying that debt for the extra 25bps of yield it provides.  It's a "win, win, win", right?

Well, until it's not.  While real median incomes in the U.S. have been stagnant for almost a
decade, real household personal consumption has continued its steady
rise as American's have simply replaced lost income with new debt.  But,
with household leverage near all-time highs and interest rates on the
rise, we suspect this could all end very badly for the U.S. consumer and those pension funds that were forced to "stretch for yield."

Per a Bloomberg article posted today, the average U.S. household is carrying roughly $133,000 worth of debt, spread between mortgages, credit cards, auto loans, student loans and the newly-popular, crowd-funded, personal loans. 



To be sure, while staggering, this is nothing new as the growth of U.S. consumer debt has basically gone exponential since the early 90's.

Consumer Credit


Meanwhile, real median household income has yet to recover to pre-recession 2007 levels.



That said, up until now, the cost of the staggering increases in notional consumer debt outstanding has been offset by lower interest rates.  As a result, historically low rates have have kept the ratio of household debt service to disposable income levels near multi-decade lows. 



But rising rates could change all this in the very near future.  As a quick example, lets assume the median household makes $56,000 per year and gets to take home 75% of that, or roughly $42,000.  As we mentioned above, the average household has roughly $133,000 of debt outstanding.  Assuming the average rate on that debt is 5% (which seems generous but stick with us) would imply $6,650 worth of interest payments per year, or roughly 16% of take home pay.

Unfortunately, a significant portion of consumer debt carries floating interest rates.  Therefore, in the most dire scenario, a 1% increase in rates will translate into an extra $1,330 of annual interest payments, $110 per month, and a roughly 3.2% reduction in discretionary personal income. 

So while the fed-induced treasury bubble has been fun for debt-thirsty Americans willing to take on any amount of leverage so long as they can afford the monthly payments, we suspect the unwind is going to be equally painful.

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Draybin Deffercon III's picture
Draybin Deffercon III (not verified) Nemontel Dec 16, 2016 2:54 AM

How does it comparez?

No debt and stacks of silver. Compare good!

HedgeJunkie's picture

This just happened.

I'm commenting on some comment on Zero Hedge.  Power goes out at 9:35 PM.  God knows what happened to that World Peace, US resolving comment.  It's in the ether or posted, I'm soon a demi-god or a simple mortal.

Power goes out.  The entire house is pitch dark.

I  have my cigarette lighter and reach for the four AAA Maglite right next to me.  I can't find it.  Using my trusty, intermittent, cig lighter, I stumble my way into the dining room and reach for the first to two sets of cabinets.  Knowing I've got six on the left set, and six on the right set.  Can't find a single fucking one.  Cig-lite stumble into the prep room, reach for my three C battery, adjustable, Maglite...find a four battery piece of shit that's dimmer than a Hillary supporter.  Move down a bit and shake my hurricane lamps to see which have fuel.  Grab two and go to the kitchen counter.  Using the flashlight on the first lamp I find the wick and light it.  On the second wick  I wind it the wrong way and it drops back into the oil.

Concerned about how light the oil is in each lamp I go to get lamp oil.  And there's only five quarts.

Note to self, you need fifty gallons of lamp oil at the minimum.  Have flashlight mounted into the walls where you normally are, armory, computer, bed, living room.  Similar with guns.  I need two more mattress pistols, two more Marine k-bars (Semper Fi, leathernecks), and two more ten round magazines.

And a shitload more water and physically possessed gold.

And getting my wife much more onboard with what I'm trying to accomplish.  We're getting old, and it won't be too long before some thirty year old can whip my ass.  She still thinks I'm Superman.

Sheesh, we used to consider 75 mph winds a high breeze.  These days they're newsworthy.

MillionDollarBonus_'s picture

Higher interest rates may hurt Americans in the short run, but if this is what it takes to stop Trump, then I’m all for it. In the long run, when our political system is restored and the threat of fascism is destroyed, it’ll be more than worth it.


Paul Kersey's picture

MDB, if higher interest rates are really what it takes to "stop Trump", and President Trump gets to appoint the Federal Reserve Board of Governors (which he does), then America will not have higher rates for very long.

JRobby's picture

They are already crushed. Annihilated is an approximation of it.

Need some stats on 7/1, 5/1 and 3/1 ARM's, HELOC's and adjustable rate CC's loaned out since 2011.


MalteseFalcon's picture

After 16 years it is time for debtors and lenders to pay for their choices. 

I don't want to pay another cent.

I don't even want to hear about it anymore.

I wasn't party to their agreement.

I only care about the fallout to the extent that it is not confined to debtors and lenders.

They can divide up the responsibility any way they like.

If people get kicked out of their homes, then they are renters, and they will have learned a valuable lesson.

If the banks fold (and I hope and know they will), find new investors to capitalize new banks with new managements and new rules.

End the FED.

No more financial repression.

Raise the rates.  Bring it on and end the all sordid business.


Paul Kersey's picture

Americans are addicted to debt. If an American buys a car, gets a $300 a month, three year auto loan, and pays that loan off, he will go out and trade it in on a new vehicle, with a $300 a month, six year loan. As long as the payment stays the same, it won't bother him much, that he has bought a vehicle that cost more than twice as much as the one he traded in, and that puts him in debt for an extra three years. Americans will not give up their debt, because debt addiction is a way of life.

The Fed is only raising interest rates so that it will be able to cut them again in the near future. Presently, it's hard to cut near-zero interest rates. With higher interest rates, the national debt will balloon even faster. Also, higher interest rates will kill cap rates on real estate, causing major asset deflation. Don't see the Trump family, for instance, wanting to watch their real estate assets deflating "big league".

JRobby's picture

"debt addiction is a way of life".

"The junk merchant doesn't sell his product to the consumer, he sells the consumer to his product. He does not improve and simplify his merchandise. He degrades and simplifies the client."

To a culture driven by conspicuous consumption, does not junk become the ultimate merchandise - a product that crystallises the most brutal imperatives of supply and demand? In equating identity with addiction and conformity with control, Junkie suggests not so much a deviation from society as its logical culmination. "I have learned the junk equation," he was to write in the book's prologue. "Junk is not a kick. It is a way of life."

Skateboarder's picture

Maglites are the bees knees. Recently I started using one of these Black Diamond laterns and boy has it been good. Dimmable ambient lantern lighting on 3 AAAs, and it lasts forever. Order one for the desk - well worth the 30 bucks. They make bigger versions too.

new game's picture

got a diamond, the shit mon. camping forever in merica, the new outlook post. deemed safe by night, cause the snowflakes are scared of the dark...

check into infared for the "real" advantage. nocturnal my friend. a whole new adventrue.

if you think print'g money is an easy advantage try seeing when everybody else cant!

USisCorrupt's picture

The consumer is already getting ass pounded on the rates they pay.

new game's picture

and they did it voluntarily. like voting for the beast. fucked up mon. half of merica has serious mental disease and it is uncurable cept by death. not suggesting to kill, just stating the obvious...

kill or be killed is an entriely different senario.

and it may just come to that as it appears the ultimate showdown is forming.

civil strife leads to civil war.


the divided nation can just divide w/o violence


The best Sun's picture

This is a large part of why the

credit bubbles have been inflated.

So debt slave sheeples can be more

thoroughly fleeced.

It is the same here in Australia.

I have NO debt.

I have for years encouraged others

to have NO debt.

It won't save me.

This scheme by banks is nothing new.

It has been evident for years that

this was the plan.

The only variation this time will be that

some of the banks that take possession

of forclosed homes will themselves go

bankrupt and be forced to sell for pennies

on the dollar to larger, connected banks,

which may then be bailed out by their 

sovereign governments, which in turn default

and can be bailed out by the rebranded IMF.

Presto chango, world central bank and world

Marxist government. World tax regime.

Massive property tax increases on remaining

owner occupiers will be cheered by those who

lost everything and are forced to rent.

What will remain?

Oligarchs and tax sheep.





Byte Me's picture

Sooner or later the bubble has to burst.

Do not be deceived.

It (the bursting of the bubble) will be categorized as a "fake news" event.

Now go back to sleep.

s2man's picture

Answer to headline -  Not me.

As for unsecured debt; screw it.   If it all crashes,  let it go and forget your credit rating.   You won't need it.

House_Wife's picture

If I'm honest I've been wishing for this to happen for years, it's about time!

2_legs_bahhhhhd's picture

I warned em all for years, paying 2% on a 400k mortgage was not much different than paying 10% on a 100k mortgage.....all I got was that dumb dear in the headlights look....yeah, but I can write off the interest paid....lmao. But but, housing prices always go up. Yup, until they run out of buyers. Vacant stare of disbelief. Real wages are declining rapidly, as you supplement your decreasing real income with credit. Nope, that fell on deaf ears too. Absolute denial on that point.

You can struggle all you want, the hook is set. Home ownership Is about to become the American nightmare.... Again

Rich Stoehner's picture

The banks will make billions

I Write Code's picture

We will find out.

It is rational to pick up debt when interest rates are so low, and that's exactly why they were kept so low.

What is not known is if there is any way to unwind this, at the individual level or at the macroeconomic level, or if it was all some ghastly mistake.  Frankly, every intro economics book written in the last fifty years says it was a ghastly mistake, but I says hold on there brother, let's wait and see.

nonutn's picture

I don't have much but I am thankful I have no debt. If I could just do something about depreciating assets and the inflating cost of living.

I saw a feather with 10% down bed pillow at Fred's today. It was $49.98.

It still belongs to them.

Long memory man's picture

You do not need a lot, if you have enough it is plenty, and you sleep well too.

Ultra's picture

Shed debt. It's gonna bite you I if you don't.

Maynard G Krebbs's picture

I learned that valuable lesson back in 2008, and have been debt free ever since... for me cash is king untill that's outlawed  !

Allen_H's picture

Same, 2009 I said enough with debt, been dealing in cash since.

poland spring's picture

Same. 2008 I eliminated all credit cards and went cash ever since.  If I don't have the money for it, I don't buy and have to wait.  Slow but steady.  Although these cash back rewards cards are tempting.  Funny thing is, my credit score dropped because of lack of credit history, lol.  I went to a car rental place and since I didn't have a credit card, I attempted to use my debit card.  They said that they have to do a credit check and I was denied!  My credit score is 770 and I got denied a car rental!  I told the guy I got thousands in the bank account that he can verify.  What a perverse upside down world we live in!

Allen_H's picture

I am in the EU, I no longer use credit cards, but I go to AVIS car rental, and they accept my VISA current account card, which is a debit card. I just put enough in it to cover the expenses and this works for us. perhaps try that. I rent a car for moving only.

Good luck.

katagorikal's picture

The overall impact depends on what the creditors do with the extra interest payment. If they spend it on consumption, there is no change in consumer spending. If they invest it, then there is a worthwhile shift from consumption to capital expenditure for building productive assets - always assuming those companies actually invest the money, rather than just buy back their own shares, which puts the money back in circulation, and then it depends what the sellers of those shares do with the money from the sale, and so on.

Unless the debtors default because they cannot afford higher rates ... then it gets more interesting ...

2_legs_bahhhhhd's picture

Anyone can see that the fed cast a yuuuuuggggg net with zirp, now the last of the fish are in....time to slowly close the net. Thanks for the collateral suckers!!!

Zero debt, zero intent, zero faith, zero patience

Raise the rates to 10% you fuckers....I dare ya

dojufitz's picture

Here in Australia...the great land of the Joe Schmo land lords........I hope it crushes them.....

GCT's picture

We oftentimes talk about indebted Americans yet the whole industrialized world is indebted.  Consumers do this to themselves and like it boggles my mind.  I am debt free and love the freedom it provides.  Pretty soon people will be taking out mortgages for vehicles. 

Learn to do with less and you will be much happier. Put money back until you can afford that vehicle and buy used, I have a 17 year old jeep that runs like a champ and a 7 year old truck.  I can spend money to repair them if I cannot do it myself.  But then many need the latest and greatest gadgets and vehicles.  A car for every child and a phone for their five year olds. 

I just do not get it.

Mr. Pain's picture

Get a WFB credit card. Max it out and file bankruptcy. Shit, why stop there. Get a Chase cared, Citi-bank card, etc....... 

moorewasthebestbond's picture

This is why my garage is stacked high with 100 can cases of North Atlantic sardines, nitrogen flushed buckets of grain, and hundreds of rolls of shit paper.

Allen_H's picture

How the fuck did the people get so fucking stupid?

That is an engineering feat on its own.

blargg's picture

Maybe these people with 100k in debt are the smart ones. When SHTF they might have their debts erased.

cowdiddly's picture

Nothing new under the Sun.

"Load sixteen tons of number nine coal. And what do you get?

another day older and deeper in debt.

St. Peter don't call me cause I can't go.

I owe my soul to the company store." Tennessee Ernie Ford 

Hmmm...........wonder when that song was written?

edifice's picture

It was written in 1946, but references the height of the Guilded Age, in the early 20th century. Child labor, bonded labor, you know, all that good stuff that we will soon be returning to.

angry_dad's picture
angry_dad (not verified) Dec 16, 2016 9:21 AM


Looks like the exploding debts run up by worthless obama are rapidly approaching foreclosure.

never give a jabroni a credit card as it always ends badly



Skiprrrdog's picture

Obama's birth certificate was proved to be a FORGERY by expert forensic examination, as announced live at a press conference yesterday by Sherriff Joe Arpaio

Why isnt ZH, or ANYONE talking about this?

Cthonic's picture

What difference does it make? The electors in the past two elections didn't give a damn about his cryptic past, his lack of executive experience, his childlike demeanor, his association with bona fide terrorists and radicals, or his foreign patronage.

Cthonic's picture

There is a helluva lot more mortgage debt floating around than " $1.1 trillion ".  Try $10.2 trillion, nerdwallet/bloomberg/idiots.

Imagery's picture

"To be sure, while staggering, this is nothing new as the growth of U.S. consumer debt has basically gone exponential since the early 90's."


Come on Tylers.  Debt began going exponential in 1971........FOR A REASON......The Gold Standard prevented fiat rehypothecations.......since Nixon's removals in 1971 (for RoW) those CBers got in on the scam as well.

And just  like in UFSA, their citizens will be destroyed as well if the World does not rid itself of CBers, TBTF WS, and their fiat currencies and credits.  These are used to steal the wealth of entire nations by 0.01% of the population.

wwxx's picture

Wayyyyyyyyyyy Wayyyyyyyyyyyyy to early to get uneasy about a mere tick in the Fed rate, but of course I have -0- debt, so I could care less.  As for all those that play the market, via credit, a little humbling for them would not be a bad thing IMO.


And then there is the rest of the world, with the United States of Pet Owners/dollar still standing as the international reserve note, there is trillions upon trillions of international debt interest rate increases that also need to rise, which is to say, -a very slow boat to china-.



SMC's picture

Only debtor fools and idiot lenders holding unsecured paper will get crushed.  Others will clean house. 

Cthonic's picture

Has anyone ever wondered why they only publish the debt service payment ratio and not the raw number?  I'll tell ya why: it keeps you from backing out the disposable income of the 0.01%.  It isn't just low rates that keeps the ratio down.