Summary
Major banks consider this a cost of doing business, as the $ 1.17 trillion in outstanding credit card debt has an average interest rate of 24.43%. To them, defaults are a meager 4%, so their yield of 24.43 is reduced to 96% of 24.43, or 23.4528…
Summary:
Meanwhile, the average consumer is ensnared in a debt spiral, struggling to meet basic living expenses or reduce credit card balances. This is a situation that should evoke not only empathy but also a sense of shared responsibility in any reader.
Article:
Excess debt is an unspoken evil in American Society. Major banks issue credit cards, such as passing out Snickers to junior high school kids. The public accepts their plight out of necessity and desperation. The debt spiral eventually spirals out of control, and the consumer must withstand personal stress with the dreadful hope that they can exit the vortex of financial bankruptcy.
Consumer debt has reached record levels as of Q3 2024, with the total amount of debt hitting an unprecedented $ 17.61 trillion. This figure has never been seen before in our country’s History, underscoring the severity of the situation.
· Credit Cards- $1.17 trillion
· Household debt- $17.61 trillion
· Mortgages $12.59 trillion
· Auto loans-$1.61 trillion
· Student Debt $1.61 trillion
Principal reductions on payments of outstanding debt are not written off on tax returns, and therefore, the debtors must pay federal and state taxes on these reductions. This means that a consumer could end up having to earn 300% of their outstanding balance to pay for principal reductions, federal and state taxes, and interest at an annualized 24.43%. For a $10,000 outstanding balance on credit cards, a consumer may need to make $30,000 to pay them off.
Working Americans are grappling with the challenge of affording family expenses that have surged due to inflation. Many consumers are compelled to resort to credit cards to cover essentials such as food, gas, and electricity for their homes, cars, daycare, and veterinary visits. A seemingly harmless night out with the family, which provides immediate satisfaction, can quickly turn into a long-term debt.
The current downward debt spiral cannot be solved without immediate and decisive government intervention. Banks will never give up their fiefdom. They are happy if the consumer pays an interest-only monthly payment forever, because that translates into a 24% annualized yield. The bank borrowed the money from the Federal Reserve, spending less than 4%, so its net yield, with virtually no risk, is 2%. Who wouldn’t like to have that formula to make money now and in the future?
Inflation is the culprit. The government creates inflation by issuing new fiat currency in the trillions, which erodes the purchasing power of the dollar, causing all goods and services to become more expensive. The average consumer cannot keep up because they are unable to invest in inflation-protected assets.
Hopefully, the incoming President, Donald Trump, will place a temporary cap on interest rates at around 10%. The new administration must also address the stresses on families and small businesses promptly. This country cannot continue to exploit the middle and lower classes as the past administration has done.
If not addressed, the current debt spiral can become a national debt spiral—“quickly and Bigley.”