Defaults on 401(k) Loans Double

More Americans are taking out 401(k) loans and more Americans are defaulting on their 401(k) loans.

Members of the Brookings Institution and Navigant Economics have released a study that concludes that, since the financial crisis hit in 2008, Americans are defaulting $37.0 billion a year on loans taken from their 401(k)s! (Source: CNN Money, July 17, 2012.)

The research notes that, in 2008, the default rate on 401(k) loans was 9.7%. Since then, the default rate has almost doubled: remaining in the high teens, with the peak being 19.8% in 2010, and the current rate running at 17.4% per year. This is an economic recovery?

Americans who cannot qualify for regular loans are taking them against their 401(k)s to pay for unforeseen expenses or to cover day-to-day bills in this supposed economic recovery. The researchers uncovered that the higher default rate is due to increased job losses in this supposed economic recovery.

With more Americans losing their jobs, they have no capacity to pay back their 401(k) loans and so have no choice but to default in this failed economic recovery.

The study also points to the fact that more and more Americans are taking out loans against their 401(k)s, because they have no choice; they’re desperately trying to maintain their standard of living as the economic recovery falters

It’s ridiculous: the study reveals that, in 2011, 18.5% of all Americans who had 401(k)s took out loans in this supposed economic recovery!

I’d argue, dear reader, that 18.5% is probably closer to the real unemployment rate in this supposed economic recovery. The people who are taking out these loans are people in their 40s or 50s who have worked hard and attempted to save for retirement.

Now they have no alternatives left; as the unemployment rate rises, they lose their jobs, and cannot find other work. Everyone can understand how they want to maintain their standard of living for the longest possible time. Of course, taking on more loans is only a temporary solution. Americans need jobs, but with a nonexistent economic recovery and a rising unemployment rate, the U.S. economy is not accommodating them.

This is a vicious circle, because these people in their 40s and 50s are in their prime earning years. These are the years where they should be able to spend more comfortably—which would help an economic recovery—and save more for retirement. Now more of them are taking loans against their retirement to pay for their basic necessities!

In light of these facts, consumer spending is being severely strained in this country, which means that economic growth will be limited. As if we didn’t need any more headwinds, if the unemployment rate does not come down soon, these people will not be able to retire comfortably. The typical thought that retirement means more spending on the part of retirees which will stimulate economic growth will not hold true, because there will be no money for retirement!

This is not a regular recession. It has gone on for too long—four years now and counting—and it is hurting the average American greatly. (See: “Moving Closer and Closer to a U.S. Recession.”)

If the unemployment rate is not repaired (and I don’t see how it can be), consumer spending will continue to come under pressure. As consumer spending accounts for 70% of GDP growth, the U.S. economic growth story is in big, big trouble.

Where the Market Stands; Where it’s Headed:

This morning, the market has sold off sharply and the media is quick to blame Europe’s woes again, particularly the concern that Greece won’t be able to make good on its bailout promises.

Of course, I see Greece (and Spain, Italy or whatever country you want to add into the pot) as the scapegoat for inexperienced reporters. The real truth is that investors are finally understanding that economic growth worldwide is slowing; maybe too quickly. Sure stocks offer good value compared to low-yielding bonds. But as Recession Part II gets underway, corporate profits will erode, putting pressure on stock dividends once again.

Technically speaking, the Dow Jones Industrial Average has put in a picture perfect “head and shoulders” pattern. The door is almost closed on the bear market rally that started in March of 2009.

What He Said:

“Many of today’s consumers have purchased properties with very little down payment. They’ve been enticed by nothing-down, interest-only, second and third mortgages. Bottom line: The lower interest rate environment sucked consumers into the housing market big-time. And that will eventually cause us all problems.” Michael Lombardi in Profit Confidential, June 22, 2005. Michael started warning about the crisis coming in the U.S. real estate market right at the peak of the boom, now widely believed to be 2005.