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The Trillion Dollar Question: Interest Rates |
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Saturday, May 08 2004 @ 11:26 AM EDT
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 Richard Russell
Let's start with a paragraph from today's New York Times. The article headline, "As Household Debt Rises, New Risk in Higher Rates." And here is the paragraph –
"A management consultant in Denver, Mr. Thomson bought at $500,000 townhouse last Friday in the suburb of North Cherry Creek. As many other first-time home-owners have done, Mr. Thomson put no money down. Instead he took out a first mortgage for 80 percent of the purchase price and paid the rest by taking a home equity loan against the new house. To reduce his monthly payments, and to qualify for a big enough loan, he took out an adjustable rate mortgage that requires him to make only interest rate payments."
And what happens if we get a spike in interest rates? The bank will own the house, that's what will happen. Is this the kind of financing that has given us a good portion of the big real estate boom or as I call it, the enormous "real estate bubble"? Yeah, I'm afraid it is.
So the trillion dollar question ahead, as I see it, is interest rates. If rates head up from here, there's going to be hell to pay. There is now about $22 trillion in domestic debt. On top of that there is an estimate seven times that outstanding in derivatives. Roughly 85 percent of all derivatives are interest-rate oriented. So the truth – nobody knows what will happen if rates start up, and more importantly if rates spike up. Nobody, I repeat, NOBODY including the Fed, has the answer to what could or will happen if rates suddenly start to spike.
The debt situation in the US is ballooning. At the Federal level the national debt is rising at almost a 10 percent rate annualized rate. Total debt in the US is now about 300 percent of the US Gross National Product, a situation never seen before.
Rest of the article.
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| Authored by: Anonymous on Saturday, May 08 2004 @ 03:20 PM EDT |
U.S. Consumer Borrowing Rose $5.7 Billion in March, Fed Says
U.S. consumers stepped up borrowing by $5.7 billion in March, the 12th straight increase, taking out more auto loans and adding to the balances on their credit cards, Federal Reserve statistics showed.
Non-mortgage debt rose 3.4 percent at an annual rate during the month, the Fed reported in Washington. Borrowing had risen by $888 million, equal to a 0.5 percent rate, in February.
Consumer spending, which accounts for two-thirds of growth, increased in March for a sixth consecutive month, the Commerce Department has reported. Today's report from the Labor Department that 288,000 jobs were added in April after 337,000 in March suggests that shoppers will keep their wallets open.
"Consumer surveys are picking up that jobs are easier to get, and this new confidence is giving consumers the confidence to make even more purchases with credit,'' Christopher Rupkey, senior financial economist at Bank of Tokyo-Mitsubishi Ltd. in New York, said before the report.
All consumer debt totaled $2.023 trillion in March.
Non-revolving debt, which includes borrowing for vehicles, mobile homes and college tuition and accounts for more than 60 percent of non-mortgage household debt, rose by $3.1 billion in March after rising by $657 million during February.
A 3.8 percent rise in auto sales in March from a year earlier may have contributed to the rise.
Rest of the article. [ Reply to This ]
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