THE DEBT TRAP
Part of the problem is the disconnect between wage growth and purchasing power, as measured by the Consumer Price Index (“CPI”) in the chart below... Average wages are now around $23 an hour. But in real terms, $23 an hour has the same purchasing power as approximately $6 an hour had 40 years ago. In other words, purchasing power for the average wage earner has not budged in the past 40 years . Keep in mind that most of the wage increases apply to the top earners. Labor value on the lower end of the spectrum isn’t keeping pace with inflation. Many people are getting poorer and are finding it hard to adjust to a lower standard of living. Like Tom and Kate, millions of Americans are turning to credit cards to fund the gap between income and expenses. These people have no hope of paying off their debts. Many can only afford to make the minimum payments each month. CONSUMER PRICE INDEX VS. AVG. HOURLY U.S. WAGES
Nearly half of credit-card account holders maintain a balance every month. They use the cards as debt “revolvers,” paying mostly interest each month. Only 30% of credit- card borrowers pay off their debt in full each month. Using a credit card this way is incredibly expensive. The interest rate on the debt tends to be extremely high – around 16% a year, according to the Federal Reserve. For subprime borrowers, the average is 23%. If you’re getting charged 16% a year and you’re only paying the minimum monthly payment, your balance doubles about every 4.5 years. At 23%, the debt doubles every three years, quickly turning small balances into large ones. And as interest rates rise, it becomes even more difficult to make even the minimum payments. This disturbing trend can only go on for so long. Eventually, millions of Americans will fall so far behind that they’ll just stop paying altogether...
One of the first things people stop paying is unsecured credit cards. There’s no immediate consequence, because there’s usually nothing of value for a creditor to take. So far in this credit cycle, nothing has snapped... yet. But the financial strain continues to grow. Credit-card delinquencies
$23.12 2019
300%
Wages are barely keeping up with inflation
250%
200%
150%
CPI
Average Hourly Wage
100%
$6.13 1979
50%
0%
1980
1983 2016 1986 1989 1992 1995 1998 2001 2004 2007 2010 2013
2019
68
April 2019
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