Paying Down Christmas Debt: How Long Will It Take

MarketWatch, citing MagnifyMoney notes that Many People Blew Their Holiday Budgets.

Shoppers in the U.S. racked up an average of $1,054 of debt this Christmas season — an increase of 5% over last year, according to a survey from MagnifyMoney, a personal finance website. It found 44% of shoppers racked up more than $1,000 in holiday debt, and 5% accumulated more than $5,000 in debt.

Bouncing back from those purchases won’t come quickly. Only half of those surveyed expected to repay the debt within 3 months — others (29%) said they need more than five months to pay it off, often leading to interest on the credit card debt and growing balances. In fact, 10% of people who took on holiday debt said they would only be able make minimum payments on credit cards. If the shopper spent $1,054, and paid a minimum payment of $25 each month, he or she would be paying down that balance until 2023. With an average interest rate of 15.9%, according to a MagnifyMoney analysis, fees on that debt could add up to $500. In August 2017, Americans hit the highest amount of credit card debt in U.S. history, at $1.021 trillion in outstanding revolving credit in June 2017.

Trends

I produced the top chart from the latest Fed G.19 Report on Consumer Credit.

The trend is unmistakable, but more so for nonrevolving credit than credit card debt.

Sure-Fire Prediction?

• The total consumer credit recession peak was $2.664 trillion in July of 2008.
• In August of 2010, total consumer credit fell to $2.518 trillion.
• Revolving credit fell from $1.021 trillion in April of 2008 to a low of $0.833 trillion in April of 2011, a three-year decline.

It is by no means a "sure-fire" prediction that credit will expand in 2018.

Writeoffs on consumer credit are poised to soar once a recession hits. Consumers will once again attempt to pay down credit card debt.

Explaining the Credit Binge

The availability of credit exploded after Nixon closed the gold window on August 15, 1971.

At that point, nations no longer had to spend their gold or hike interest rates to stop the flow of gold on trade deficit balances.

Balance of Trade

Sorry State of Affairs

After Nixon closed the gold window, consumers could borrow all they wanted to buy junk from China and cars from Japan.

And with China and Japan accumulating US assets in return, there was a guaranteed buyer of US treasuries at increasingly lower interest rates.

GDP is in a funk because of debt overhang. Consumers struggle to pay down debt. Many can't because they are overleveraged to their homes.

This is all very inflationary until the bubble bursts once again. And when it does, faith in central banks will take a big hit. I expect gold will be the beneficiary.

When Does Gold Do Well?

Gold is not really an inflation hedge per se. Gold fell from $850 in 1980 to $250 in 2000 with inflation every step of the way.

Rather, gold performs well in specific instances, the primary one being a loss of faith that central banks have things under control.

Do central banks have everything under control? The charts suggest otherwise.

For further discussion, please see How Much Gold Should the Common Man Own?