Inflation and a broad economic downturn have eroded American savings
that were built up during the pandemic, leading people
to put more purchases on their credit cards, which
has created a dangerous cycle with us credit card debt
actually surpassing excess savings for the first time in three
years. And economists worry that it could spell a
recession in the coming months. Joined now by Caleb
Silver editor in chief at Invested Caleb. It's good
to see you. Good to see you. So
obviously a lot of Americans under financial pressure now perhaps
concerned about losing their job just trying to get by
with basic expenses rising and the cost of essentials still
high. What jumps out to you about this debt
versus savings imbalance? Yeah. Well, we're talking
about excess savings here. So think of that as
surplus savings, there's the personal savings rate. That's
what Americans are normally able to put away every month
, that excess savings and a lot of it was
built during the pandemic when we were getting stimulus checks
from the government. A lot of that is now
eroding away and that's because we're having rising interest rates
, record credit card levels of debt and that now
makes revolving credit card debt revolving debt in general higher
than that excess savings rate. Not a great sign
, especially with this very persistent inflation and Americans getting
a little bit more stretched as potentially as the economy
slows down here. Right? So I'm reading here
, credit card balance is up almost 20% just from
a year ago when inflation had been an issue even
at that point for several months. Is there concern
that we could be seeing a debt bubble? And
what might that potentially mean? Yeah, a debt
bubble is not what the doctor ordered here at all
. And what it means is that because of these
higher interest rates, that means credit card APRs in
particular are much higher. They're between somewhere between 22
24%. You just talked about the mortgage rate still
north of 6% auto loans again, north of 6%
. So all of these are driving that consumer credit
much higher and when consumers start to feel tight,
especially if the economy starts to slow or we get
more laughs, they're going to stop spending. And
as you know, consumer spending 60% 70% of us
GDP. So that could really accelerate a slowdown and
a potential recession if consumers get a little bit more
strapped in terms of their expenses. Now, the
good news here is that we still have a very
relatively low level of defaults, a relatively low but
climbing level of foreclosures, those are on the rise
but not like they were in 2008 and a very
low auto loan delinquency rate, although that is rising
as well. So we've got to keep our eyes
on all of those metrics right now. But the
general point is the savings that a lot of Americans
had built up, that's basically gone as we're spending
more to finance the purchases we need to make.
Ok. So I think we have a full screen
here to talk about those foreclosures and even auto loan
delinquencies Caleb that we can show here when we get
to our next point. But knowing all of this
, because you're able to connect the dots between main
street and Wall Street, what does this potentially mean
for stocks for anyone who might be wondering, should
I pull some money out of the stock market if
I am going to need more money to get by
? Yeah. Well, that's one of the first
things that goes, Kristen is when people feel a
little bit tighter in terms of finances, they stop
saving as much as they used to or they stop
saving altogether and they definitely stop investing. So we've
definitely, we've seen this in the past year or
so as inflation was rising, the amount of money
that people were putting away, whether it was their
401 Ks or their personal Iras or their own brokerage
account that dwindles significantly. And you see that definitely
throughout the income strata, wealthier households are able to
actually do a little bit of both. But they're
also the first to pull in terms of investing dollars
. So we're going to probably see that take place
in the market in terms of investors starting to pull
back and invest less of available cash. We know
a lot of investors have been going to cash.
Does that mean they're going to continue to put money
in the bank now that there's 4% returns and cds
and other products. So it's not a good sign
for the stock market, not a great sign for
the retail sector in particular. And what's odd,
Kristen and I know you've noted this is that the
luxury part of the retail sector is doing quite well
now, but there are signs of cracking in the
middle to lower ranges there. So how should consumers
and investors Caleb again because you have this unique perspective
of Main Street and Wall Street prepare for the rest
of the year? What might be in store?
Well, maybe the interest rates are going to kind
of stay around this level. We're going to get
another rate hike meeting in the beginning of May,
maybe the fed raises another quarter point. That could
be it. But you're still going to have these
have these persistently high levels of interest rates going through
into next year. So you have to think about
your high interest debt if you have high interest credit
card debt, you want to consolidate that maybe take
a loan to pay off some of those higher debts
, but make sure you're paying back that loan and
also keep an eye on the just discretionary purchases.
We were doing a lot of spending a lot of
revenge travel spending in particular last year that may dwindle
down as well. So you could get this broad
slowdown in the luxury and then sort of the discretionary
spend and that could bleed all the way down into
the basics if we get into a recession right now
. But as a consumer, you definitely want to
watch what you're paying every single month. And if
you have that high interest debt over 20% consolidate it
down, move everything to a much lower interest rate
if you can. All right, Caleb Silver editor
in chief at Investopedia. Caleb. Thank you for
the breakdown.