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China switches currency link from dollar to basket of currencies
By Bill King
The King Report
M. Ramsey King Securities
www.thekingreport.com
Wednesday, July 20, 2005
Buried in Sunday's Wall Street Journal, Section D,
Page 2, is a frightening article with immutable
math.Despite extremely low interest rates,
consumers are paying a record amount of disposal
income to service debt.Fifty percent of consumer
and 26 percent of mortgage debt is variable.
This is what forces Easy Al and his cohorts to
issue rosy propaganda but keep real rates negative.
Anyone with an elementary understanding of math
and finance realizes that any significant hike in
interest rates could trigger the dreaded debt
deflation.
* * *
When the Bills Come Due, Then What?
By Kelly K. Spors
The Wall Street Journal
Sunday, July 17, 2005
http://online.wsj.com/article_email/0,,SB112154542153387582-
IFjgoNllad4opypbXyHba6Bm4,00.html
Thanks to rock-bottom interest rates and easy ways to borrow,
consumers have been on an all-out spending spree for several years.
Now, though, there are signs that the bills may be piling up too
high.
The portion of Americans' disposable income devoted to paying off
debt hit a record high recently, even though interest rates have
stayed at record lows. That could put a financial squeeze on many
households if and when long-term interest rates finally start to go
up.
U.S. consumers are more vulnerable than ever to rate increases
because they've taken on more adjustable-rate debt in recent years --
meaning monthly payments fluctuate when interest rates change.
Nearly half of all consumer debt and 26% of all mortgage debt is now
adjustable, estimates Joe Abate, senior economist at Lehman
Brothers. That's a stark change from the early 1980s when nearly all
debt had fixed rates. Other estimates peg adjustable-rate debt at
closer to 20% of all consumer debt.
"When all these [adjustable-rate] mortgages reset soon, some of
these people are going to see their monthly payments rise by a few
hundred dollars a month," Mr. Abate says. "That's a real significant
bump for all those people complaining now that gas prices have risen
over $2 a gallon."
And recent data suggest the debt burden on households is growing
heavier, despite low interest rates. The "debt service ratio," the
Federal Reserve's estimate of the ratio of debt payments to after-
tax income, hit 13.4% in the first quarter of this year, an all-time
high since the Fed began tracking it in 1980. The financial
obligations ratio, which adds automobile lease and rent payments,
homeowners insurance and property-tax payments to the debt service
ratio, was 18.45% last quarter, near the record high of 18.84% in
late 2002.
Overall, U.S. consumers now owe roughly $11 trillion, nearly double
what they owed a decade ago. The vast majority of that debt growth
came from people taking out big mortgages and tapping their
escalating home equity. Total household debt grew 11.2% in 2004, the
largest year-to-year increase since 1986.
"We're still in the midst of this consumer debt binge," says Kathy
Bostjancic, U.S. senior economist at Merrill Lynch & Co. As long as
the housing boom continues, "it's going to give consumers a false
sense of security."
Many economists including Ms. Bostjancic predict that if mortgage
rates see a noticeable rise from the 6% of recent months, many
housing markets will slow and prices will flatline, or even drop in
some especially hot markets. Oddly, long-term rates have stayed low
despite the Fed's steady short-term rate increases that started last
summer -- a phenomenon that Fed Chairman Alan Greenspan recently
dubbed a "conundrum."
Here's the impact rising rates can have on household finances: A
family with a 30-year adjustable-rate mortgage with a 5% interest
rate would see its monthly payment jump from $1,074 to $1,468 -- a
37% leap -- if mortgage rates rose to 8%. Couple this with rises in
other debt payments such as credit cards, home-equity loans and
such, and households may struggle to pay all the bills each month.
The rise in payments due could be exacerbated if job growth and
incomes don't keep pace.
For consumers, this means it's high time to make a serious dent in
their debts, especially those with adjustable-rate debts such as
many mortgages, home-equity loans and credit cards. While it may not
be realistic to pay off some debts entirely (easier said than done),
borrowers can at least make more than the minimum payments each
month -- and cut back or stop buying on credit.
After all, most analysts still think that long-term rates have
nowhere to go but up, and that there will be a modest increase by
year end. Once rates rise, all the consumers who have overloaded
themselves with adjustable-rate debt on mortgages, home-equity loans
and credit cards will probably see their minimum monthly payments
climb. And if housing prices stop rising, they'll be less able to
tap their home equity to help cover the swelling bills. In severe
cases, if consumers can no longer afford their monthly payments,
this could mean more defaults and foreclosures in some cases.
Already, affordability concerns are popping up. A recent analysis of
jumbo mortgages, those with loans above $359,650, by Bear Stearns
showed that the average initial mortgage payment on mortgages rose
to $2,338 in the first quarter of this year, up from $2,060 late
last year. It suggests home buyers might be struggling to keep the
price of their home low.
Consumers who have taken advantage of innovative loan products like
interest-only loans also will feel the pinch of rising rates, since
those loans require only interest payments early on, no principal,
but require heftier payments later on. And that number has risen
significantly during the past couple years: About 27% of all new
mortgages so far this year (excluding refinancings) were interest-
only, according to LoanPerformance, a unit of First American Corp.
that tracks 46 million mortgages monthly and provides information to
lenders and others in the industry. Only 1.6% of all new mortgages
were interest-only in 2001.
Much of the debt spree reflects unusual market trends in recent
years, particularly the housing boom. Even as the U.S. economy
sputtered and jobs fizzled in 2001 and 2002, consumers continued to
borrow and spend as they did during the raging 1990s bull market.
But as home prices surged and interest rates hit record lows,
consumers took out bigger mortgages and started tapping their
escalating home equity like a credit card. U.S. regulators kept
interest rates low to keep the economy chugging.
"It was a good strategy in that we needed something to boost the
economy in the economic downturn," says Dean Baker, founder of the
Washington think tank Center for Economic and Policy Research. "But
it sets us up for an even worse crash when housing" cools. "In the
long term, we'll probably regret it."
What's more, consumers' attitude about debt is changing, says Robert
D. Manning, a finance professor at Rochester Institute of
Technology. While older generations are more debt-averse and cut
spending during economic downturns, younger generations rely on debt
for spending money. "What we're seeing here is really a deferral of
the financial responsibility and consequences," Mr. Manning
says. "We may be heading into a very gut-wrenching period."
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