For those who follow the monthly consumer credit report released by the Fed there was nothing surprising in today's release of the latest Household Debt and Credit Report by the New York Fed. It reports that total household debt rose to $12.12 trillion in Q4, up from $11.83 trillion a year ago...
...mostly as a result of soaring student and auto debt, both trends we have observed on various occasions in the recent and not so recent past.
There is more in the report (a notable discussion focuses on why housing credit has stagnated as much as it has with the Fed seemingly unable to grasp that the bulk of housing purchases in the US in recent years have been by offshore oligarchs using all cash transactions to park money in US luxury housing), but what is the topic of this post is another finding by the Fed, namely that Americans in their 50s, 60s and 70s - the Baby Boom generation - are carrying unprecedented amounts of debt, a shift which according to the WSJ "reflects both the aging of the baby boomer generation and their greater likelihood of retaining mortgage, auto and student debt at much later ages than previous generations."
Incidentally, those debt "retention" are entirely thanks to the Fed which has only itself to thank for: with deposits yielding nothing, an entire generation of Americans 50 and older has been fored to resort increasingly to more and more debt, until this happens:
What this chart shows is that while per capita debt at age 30 fell by 12%; per capita debt at age 65 grew by 48%!
Worse, as the chart below show, while aggregate debt of Gen-Xers has admirably declined by 12% in the past 12 years, the aggregate debt of the average Baby Boomer has soared by an unprecedented 169%!
The biggest shocker: an 886% increase in student loan debt of Americans aged 65 and older.
Some more details from the WSJ: the average 65-year-old borrower has 47% more mortgage debt and 29% more auto debt than 65-year-olds had in 2003.
Some more observations:
Just over a decade ago, student debt was unheard of among 65-year-olds. Today it is a growing debt category, though it remains smaller for them than autos, credit cards and mortgages. On top of that, there are far more people in this age group than a decade ago.
The result: U.S. household debt is vastly different than it was before the financial crisis, when many younger households had taken on large debts they could no longer afford when the bottom fell out of the economy.
The shift represents a “reallocation of debt from young [people], with historically weak repayment, to retirement-aged consumers, with historically strong repayment,” according to New York Fed economist Meta Brown in a presentation of the findings.
Why is this a problem in a world in which cash flow is increasingly scarce? "Older borrowers have historically been less likely to default on loans and have typically been successful at shrinking their debt balances. But greater borrowing among this age group could become alarming if evidence mounted that large numbers of people were entering retirement with debts they couldn’t manage. So far, that doesn’t appear to be the case. Most of the households with debt also have higher credit scores and more assets than in the past."
Assets mostly in the form of equities and bonds, however, those assets will need to be liquidated one way or another to repay what is a record debt load as the Baby Boomer generation grows even old and ever more in debt.
For now, however, the debt repayment cliff has not been hit as banks allow creditors to roll over existing obligations. This means that while debt among the elderly is at record levels, the percentage of this debt that is in some stage of delinquency has been steadily dropping. The NY Fed founds that only 2.2% of mortgage debt was in delinquency, the lowest since early 2007. Credit card delinquencies also declined, while auto loan and student loan delinquencies were unchanged.
“The household sector looks much better positioned today than in 2008 to absorb shocks and continue to contribute to the economic expansion,” said New York Fed President William Dudley in prepared remarks.
Actually, the most debt-sensitive part of the household sector, the Baby Boomers, has never been more vulnerable, and only low rates have allowed this generation to ignore the elephant in the room; with the Fed now hiking rates, this will change drastically in the coming years.
There was some good news in the report: by contrast the overall debt balances of most young borrowers haven’t grown or have declined. The average 30-year-old borrower has nearly three times as much student debt as in 2003. But these borrowers have so much less home, credit card and auto debt that their overall debt balances are lower.
Which also explains why not only are Millennials locked out of purchasing homes, but have become the "renting generation", one where everything is based on the principle of a "sharing economy", where little to no actual asset purchases are required, and where a la carte renting of goods and services for instant needs has become the new norm.
Indeed, as NY Fed economist Meta Brown admits, this shift for young borrowers could have “consequences in terms of both foregone economic growth and young consumers’ welfare." Sadly, with few well-paying jobs for Millennials available, and with little ability to build up an asset or savings base, these trends will continue until they too hit a plateau of unsustainability.
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The full NY Fed report is below (pdf link)