Borrowing like Drunkards
Here are some startling statistics released by the U.S. Federal Reserve last week:
— Average net worth of an American increased by 2.7% in the first quarter of 2006.
— Average American consumer debt increased at annual rate of 11.6% in the same quarter.
Consumers are continuing on their path of borrowing more than they are making and borrowing more than their net worth is growing. The consumer borrowing binge continues.
While many market watchers, including myself, were expecting consumers to start cutting back on their borrowing because of higher interest rates, American consumers continue to leverage at an ever alarming pace. Consumer mortgage debt grew by an astonishing $250 billion in the first quarter of 2006.
The more consumers borrow like drunkards, the harder the fall will be when this economy stalls. Last week Fed Chairman Bernanke said recent increases in inflation are “unwelcome developments,” leading most analysts to now expect a 17th straight U.S. interest rate increase on June 28.
If consumers think they can just continue borrowing at a clip faster than their incomes and net worth are increasing, they are simply fooling themselves. Home prices are not rising as fast as they used to. It will eventually become more difficult for consumers to borrow against their properties. Using common sense, the world’s biggest economy can’t continue to growth when interest rates rise 16 consecutive times… 17 times by the end of this month.
Stock markets around the world took big losses over the past two weeks. The stock market, as a leading indicator, sees economic growth slowing globally. Unfortunately, consumers are not tuning in. They continue to borrow more, setting us up for a bigger economic fall.