Lew Rockwell

Americans have loaded themselves down with debt and some are struggling to pay the bill.

Total household debt hit a record $13 trillion in 2017, eclipsing levels seen on the eve of the Great Recession. Americans have been burning up the credit cards. Revolving debt grew by $26 billion in the fourth quarter of 2017 alone, a 3.2% increase. Americans have run up a nearly $1 trillion credit card tab. Meanwhile, flows into serious delinquency have increased steadily since the third quarter of 2016.

The delinquency level for subprime credit cards is particularly concerning, having risen to a level higher than at the peak of the financial crisis.

Smaller banks hold much of the subprime credit card debt. In order to compete with the bigger banks, small financial institutions need to take on greater risk to build their credit base. As a result, delinquency rates tend to run higher for these small-bank credit cards.  And they are currently rising at an alarming pace.

In fact, credit card delinquencies for more than 4,700 small banks rose to 5.9% in the first quarter of this year, higher than at the peak of the Great Recession, according to a recent Wolf Street article. Meanwhile, the credit-card charge-off rate at these banks spiked to 7.99%, approaching the financial crisis peak of 8.78%.

As the chart below shows, delinquency rates are also creeping upward at the 100 largest banks.

And with interest rates pushing upward, things are only going to get worse. Delinquency rates will likely rise higher as monthly minimum payments increase.

Wolf Street explains how small banks got into this mess.

The thousands of smaller banks couldn’t compete with those offers [extended by big banks], and so they got deeply into subprime cloaked in sloppy underwriting. This way, they were able to reel in new credit-card customers that the big banks didn’t want, and those customers needed the money and charged up their new cards in no time, and the interest rates of 25% or 30% looked good on the banks’ income statement and helped maximize executive bonuses, yes even at smaller banks. But turns out, those banks had reeled in the most fragile customers and had eagerly doused them in irresponsible levels of debt at usurious interest rates – and now what? These customers won’t ever be able to pay off the balances or even pay the interest. For many of them, there’s only one way out. This caused the delinquency rate to spike from 3.81% to 5.90% in just three quarters.”

These small banks hold only a small fraction of credit card balances, so the rising delinquency rates don’t pose any real threat to the banking system. But they should still raise concern.

Consider that the last time subprime credit card delinquency rates were this high, the economy was in the midst of a massive recession with unemployment spiraling toward 10%. Today, we’re supposedly enjoying a robust economy with unemployment near historic lows. Something doesn’t add up.

As Wolf Street points out, rising delinquency and charge-off rates point to credit problems at the margin.

The consumer spending binge in recent years has been funded not by surging incomes at the lower 60% of the wage scale, where real wage stagnation has reigned, but by borrowing – particularly via credit cards and auto loans. Both of them have turned sour at the margins.”

This dovetails with what Peter Schiff has been saying for months. Despite all of the optimism out there and the supposedly robust economy, Americans are broke. Things aren’t nearly as good out there as the pundits and politicians want you to believe.