Record Consumer Debt: Just One Risk to the Financial System

The average Joe (or Jane) has been borrowing like never before.

Here’s a Feb. 16 CNBC headline:

Consumer debt hits record $16.9 trillion as delinquencies also rise

As you might imagine, if a deflationary depression occurs, the rate of the rise in delinquencies will likely accelerate.

And just know that the possibility of a deflationary depression developing is very much real.  

You see, consumer debt is but a part of the bigger debt picture which poses a risk to the financial system.

This is from an Elliott Wave Theorist which published in 2022:

Many national and international banks still have sizeable portfolios of “emerging market” debt, mortgage debt, consumer debt and weak corporate debt.

Some of the biggest banks also have a shockingly large exposure to leveraged derivatives. The estimated representative value of all OTC derivatives in the world today is $610 trillion, about half of which is held by U.S. banks. Many banks use derivatives to hedge against investment exposure, but that strategy works only if the speculator on the other side of the trade can pay off if he’s wrong.

Although many banks today appear to be well capitalized, that condition is mostly thanks to the great asset mania, which is ending. Much of the credit that banks have extended, such as that lent for productive enterprise or directly to strong governments, is relatively safe. Much of what has been lent to weak governments, real estate developers, government-sponsored enterprises, stock market speculators, venture capitalists, cryptocurrency investors, consumers, and so on, is not. One expert advised, “The larger, more diversified banks at this point are the safer place to be.” That assertion will surely be severely tested in the coming depression. In my view, local, conservatively run banks — a few of which exist — will prove to be safer.

There are four conditions in place at many banks that pose a danger: (1) exposure to leveraged derivatives, (2) optimistic safety ratings of banks and their debt investments, (3) inflated values for the property that borrowers have put up as collateral for loans and (4) the substantial size of the mortgages that their borrowers hold compared both to the underlying property values and to the clients’ potential inability to make payments under adverse circumstances. All these conditions compound the risk to the banking system of deflation and depression. [emphasis added]