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After Years Of “Stimulus” Come Surging Debt & Falling Wages

After Years Of "Stimulus" Come Surging Debt & Falling Wages

Authored by Ryan McMaken via The Mises Institute,

As interest rates rise…

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After Years Of "Stimulus" Come Surging Debt & Falling Wages

Authored by Ryan McMaken via The Mises Institute,

As interest rates rise on everything from mortgages to car loans to Treasurys, that also means interest is rising on credit card debt. That's not exactly great news as so many indicators point to a recession - and the worsening job situation that comes with it - on the horizon. Many Americans may soon find themselves in a situation with more debt at higher interest rates, all while real wages are falling. 

Earlier this month, Bankrate.com reported that the average credit card interest rate has climbed to 19.04%. That's a 30-year high and the highest rate since 1991, when the rate hit 19%. That can mean real financial trouble for ordinary households, but it's what we should expect in the wake of this year's policy shift at the Federal Reserve to finally allow interest rates to drift upward after more than a decade of quantitative easing and ultralow-interest-rate policy. Over the past year, the Fed has increased the target federal funds rate from 0.25% from 4.0%. NBC reports on how this affects credit card debt:

Increasing the federal funds rate cranks up what's known as the prime rate. That's the interest rate banks charge their most creditworthy customers. Currently, it is 7%. The final annual percentage rate for a credit card is determined by the prime rate plus a bank's margin for lending to a given customer.

The new average is a substantial increase from the 16.3% average rate for credit cards at the beginning of the year. According to Bankrate, if you carry a $5,000 balance on a credit card — which is the current national average — making just the minimum payment each month at that rate would cost $5,517 in interest over 185 months, or about 15 years. At today's 19.04% rate, you would pay $6,546.

The Fed report also reported "The strength in credit card demand and access coincided with the record growth in credit card balances over the past year." In its third-quarter report on household debt, the Fed further noted "Credit card balances saw a $38 billion increase since the second quarter, a 15% year-over-year increase marked the largest in more than 20 years."

Consumers apparently also expect to be spending more with credit cards in the near future, as well, as many are applying for even more consumer credit. According to a new report released Monday from the New York Federal Reserve, Americans are pursuing less new mortgage and auto debt, but continue to turn to credit cards:

The application rate for credit cards remained robust during 2022, reaching 27.1% in October 2022, above its October 2021 level of 26.5% and its pre-pandemic reading of 26.3% in February 2020. The average application rate for credit cards for 2022 overall was 26.7%, 3.6 percentage points higher than the average rate for 2021.

Should we be worried about this? Fed economists would tell you no because it is assumed that Americans allegedly have a huge savings stockpile that they can use to avoid defaults or pay down debt. Yet, this casual attitude toward mounting debt appears less and less warranted every day. With the job market softening, real wages falling, and interest rates rising, rising debt levels can't so easily be waved off. 

A Free Money Surge Followed by Plummeting Saving Rates

After all, back in 2021, consumers were indeed using their stimulus checks to pay off credit card debt. They were saving more than they have in decades. Plus, as the Fed further pushed down interest rates, consumers were refinancing home loans into even cheaper loans. Yet, as the new spike in credit card debt shows, those days are over. Moreover, now that the stimulus checks have dried up, the savings rate has plummeted to the lowest level we've seen since 2008

It appears that savings stockpile has not yet been totally depleted, but we're already well on the way there. Some analysts estimate this means consumers have about nine to twelve months left in that savings cushion.

But this may prove to be optimistic depending on at least three factors: if real wages continue to fall, if job losses mount quickly, and if interest rates continue to rise. 

Falling Wages, Job Losses, and Rising Interest Rates

First, there's the problem of real wages. As we've seen, price inflation has been exceeding wage growth, and this has meant ordinary Americans (on average) have seen their real wages fall for nineteen months in a row. That won't exactly help expand workers' savings.

Second, it can no longer be said there is an economy-wide worker shortage. Certainly, there do appear to still be worker shortages in retail services and food services, but real estate and tech don't appear to be faring as well. Rather, every week now brings multiple announcements of new layoffs from tech firms and from real estate/construction firms. After tens of thousands of layoffs announced in recent weeks from Facebook, Amazon, and Twitter, Google announced 10,000 layoffs today, and Fidelity National Information Services announced thousands more. Real estate sales platform Redfin, has recently closed it home-flipping business and cut more than 800 employees. 

From real estate to tech to the crypto economy, we can expect more layoffs and losses as easy money tightens up.

And finally, the issue of rising interest rates which, in addition to bringing job losses in the larger economy, will accelerate the burden that new credit card debt places on consumers. This will lead to rising delinquencies and tightening budgets overall. Some observers have suggested that credit card debt is no big deal right now because total credit card debt—even with the current surge over last year's totals—is not significantly above the longer-term trend. That would be fairly compelling were it not for the fact that these mounting debts are also happening alongside one of the fastest increases in interest rates we've seen in decades. Thanks to the Fed getting so behind the curve on price inflation, we're in the midst of the fastest cycle in rising interest rates since at least the 1980s. Yet, over the past 40 years, rising debt levels have occurred alongside ongoing declines in interest costs. Now that process is going in reverse, and interest rates have rapidly returned to 2007 levels. If the current upward trend in interest rates continue, this could mean a sizable increase in the burden that consumer debt places on ordinary households. 

All of this would be made worse, of course, by further slide into recessionary territory. Up until this month's election, both the Fed and the Administration repeatedly denied that a recession is coming or is already here. This was in spite of two quarters of row of declining economic growth which has generally been labeled a recession by economists. But even if the first half of 2022 ends up not being labeled a recession, the data now strongly points toward one in 2023. The yield curve has inverted, global trade is softening, advertisers are pulling back, and real estate prices are sliding toward declines.

Recession Almost Guaranteed

Indeed, now with the election safely over, even some Fed economists are starting to admit a recession is in the works. Eric Rosengren earlier this month admitted that a recession is likely, although he was careful to call it a "mild" recession. This is highly significant because the role of Fed economists is to generally be cheerleaders and to never speak of recessions until they are undeniable. After all, then-Fed Chair Ben Bernanke denied a recession was in the works as late as the first quarter of 2008. That was months after the recession had already started. The Fed always underplays secession risk, so it is remarkable if Rosengren is admitting any sort of recession is likely. Meanwhile, the administration now admits the boom days are over, but is now insisting that a soft landing is possible, and there will merely be a slowing of economic growth

Yet, for all the positive talk, Americans are piling on more debt just as real wages are falling, job losses are mounting, and debt costs are rising. In all this, we can thank the economists and technocrats at the Federal Reserve for years of malinvestments and an economy of zombie companies and fragile household budgets built on a shaky foundation of easy money and mounting debt. It didn't have to be this way, but the regime is addicted to easy money and the Fed is more than happy to oblige. Now we have to deal with the inevitable bust that comes after the artificial and unnecessary inflationary boom. 

Tyler Durden Wed, 11/23/2022 - 11:16

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One city held a mass passport-getting event

A New Orleans congressman organized a way for people to apply for their passports en masse.

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While the number of Americans who do not have a passport has dropped steadily from more than 80% in 1990 to just over 50% now, a lack of knowledge around passport requirements still keeps a significant portion of the population away from international travel.

Over the four years that passed since the start of covid-19, passport offices have also been dealing with significant backlog due to the high numbers of people who were looking to get a passport post-pandemic. 

Related: Here is why it is (still) taking forever to get a passport

To deal with these concurrent issues, the U.S. State Department recently held a mass passport-getting event in the city of New Orleans. Called the "Passport Acceptance Event," the gathering was held at a local auditorium and invited residents of Louisiana’s 2nd Congressional District to complete a passport application on-site with the help of staff and government workers.

A passport case shows the seal featured on American passports.

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'Come apply for your passport, no appointment is required'

"Hey #LA02," Rep. Troy A. Carter Sr. (D-LA), whose office co-hosted the event alongside the city of New Orleans, wrote to his followers on Instagram  (META) . "My office is providing passport services at our #PassportAcceptance event. Come apply for your passport, no appointment is required."

More Travel:

The event was held on March 14 from 10 a.m. to 1 p.m. While it was designed for those who are already eligible for U.S. citizenship rather than as a way to help non-citizens with immigration questions, it helped those completing the application for the first time fill out forms and make sure they have the photographs and identity documents they need. The passport offices in New Orleans where one would normally have to bring already-completed forms have also been dealing with lines and would require one to book spots weeks in advance.

These are the countries with the highest-ranking passports in 2024

According to Carter Sr.'s communications team, those who submitted their passport application at the event also received expedited processing of two to three weeks (according to the State Department's website, times for regular processing are currently six to eight weeks).

While Carter Sr.'s office has not released the numbers of people who applied for a passport on March 14, photos from the event show that many took advantage of the opportunity to apply for a passport in a group setting and get expedited processing.

Every couple of months, a new ranking agency puts together a list of the most and least powerful passports in the world based on factors such as visa-free travel and opportunities for cross-border business.

In January, global citizenship and financial advisory firm Arton Capital identified United Arab Emirates as having the most powerful passport in 2024. While the United States topped the list of one such ranking in 2014, worsening relations with a number of countries as well as stricter immigration rules even as other countries have taken strides to create opportunities for investors and digital nomads caused the American passport to slip in recent years.

A UAE passport grants holders visa-free or visa-on-arrival access to 180 of the world’s 198 countries (this calculation includes disputed territories such as Kosovo and Western Sahara) while Americans currently have the same access to 151 countries.

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Fast-food chain closes restaurants after Chapter 11 bankruptcy

Several major fast-food chains recently have struggled to keep restaurants open.

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Competition in the fast-food space has been brutal as operators deal with inflation, consumers who are worried about the economy and their jobs and, in recent months, the falling cost of eating at home. 

Add in that many fast-food chains took on more debt during the covid pandemic and that labor costs are rising, and you have a perfect storm of problems. 

It's a situation where Restaurant Brands International (QSR) has suffered as much as any company.  

Related: Wendy's menu drops a fan favorite item, adds something new

Three major Burger King franchise operators filed for bankruptcy in 2023, and the chain saw hundreds of stores close. It also saw multiple Popeyes franchisees move into bankruptcy, with dozens of locations closing.

RBI also stepped in and purchased one of its key franchisees.

"Carrols is the largest Burger King franchisee in the United States today, operating 1,022 Burger King restaurants in 23 states that generated approximately $1.8 billion of system sales during the 12 months ended Sept. 30, 2023," RBI said in a news release. Carrols also owns and operates 60 Popeyes restaurants in six states." 

The multichain company made the move after two of its large franchisees, Premier Kings and Meridian, saw multiple locations not purchased when they reached auction after Chapter 11 bankruptcy filings. In that case, RBI bought select locations but allowed others to close.

Burger King lost hundreds of restaurants in 2023.

Image source: Chen Jianli/Xinhua via Getty

Another fast-food chain faces bankruptcy problems

Bojangles may not be as big a name as Burger King or Popeye's, but it's a popular chain with more than 800 restaurants in eight states.

"Bojangles is a Carolina-born restaurant chain specializing in craveable Southern chicken, biscuits and tea made fresh daily from real recipes, and with a friendly smile," the chain says on its website. "Founded in 1977 as a single location in Charlotte, our beloved brand continues to grow nationwide."

Like RBI, Bojangles uses a franchise model, which makes it dependent on the financial health of its operators. The company ultimately saw all its Maryland locations close due to the financial situation of one of its franchisees.

Unlike. RBI, Bojangles is not public — it was taken private by Durational Capital Management LP and Jordan Co. in 2018 — which means the company does not disclose its financial information to the public. 

That makes it hard to know whether overall softness for the brand contributed to the chain seeing its five Maryland locations after a Chapter 11 bankruptcy filing.

Bojangles has a messy bankruptcy situation

Even though the locations still appear on the Bojangles website, they have been shuttered since late 2023. The locations were operated by Salim Kakakhail and Yavir Akbar Durranni. The partners operated under a variety of LLCs, including ABS Network, according to local news channel WUSA9

The station reported that the owners face a state investigation over complaints of wage theft and fraudulent W2s. In November Durranni and ABS Network filed for bankruptcy in New Jersey, WUSA9 reported.

"Not only do former employees say these men owe them money, WUSA9 learned the former owners owe the state, too, and have over $69,000 in back property taxes."

Former employees also say that the restaurant would regularly purchase fried chicken from Popeyes and Safeway when it ran out in their stores, the station reported. 

Bojangles sent the station a comment on the situation.

"The franchisee is no longer in the Bojangles system," the company said. "However, it is important to note in your coverage that franchisees are independent business owners who are licensed to operate a brand but have autonomy over many aspects of their business, including hiring employees and payroll responsibilities."

Kakakhail and Durranni did not respond to multiple requests for comment from WUSA9.

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Industrial Production Increased 0.1% in February

From the Fed: Industrial Production and Capacity Utilization
Industrial production edged up 0.1 percent in February after declining 0.5 percent in January. In February, the output of manufacturing rose 0.8 percent and the index for mining climbed 2.2 p…

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From the Fed: Industrial Production and Capacity Utilization
Industrial production edged up 0.1 percent in February after declining 0.5 percent in January. In February, the output of manufacturing rose 0.8 percent and the index for mining climbed 2.2 percent. Both gains partly reflected recoveries from weather-related declines in January. The index for utilities fell 7.5 percent in February because of warmer-than-typical temperatures. At 102.3 percent of its 2017 average, total industrial production in February was 0.2 percent below its year-earlier level. Capacity utilization for the industrial sector remained at 78.3 percent in February, a rate that is 1.3 percentage points below its long-run (1972–2023) average.
emphasis added
Click on graph for larger image.

This graph shows Capacity Utilization. This series is up from the record low set in April 2020, and above the level in February 2020 (pre-pandemic).

Capacity utilization at 78.3% is 1.3% below the average from 1972 to 2022.  This was below consensus expectations.

Note: y-axis doesn't start at zero to better show the change.


Industrial Production The second graph shows industrial production since 1967.

Industrial production increased to 102.3. This is above the pre-pandemic level.

Industrial production was above consensus expectations.

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