Inflation is in the Rear-View Mirror

43 percent of credit card holders carry a balance. Delinquencies are rising. It's a deflationary debt trap.

Revolving Credit Hits New Record High

In December, revolving debt has topped the previous high-water mark of $1.021 trillion set in April of 2008. Debt as of December 2017 (the latest available) is $1.028 trillion.

Relationship Killer

In addition to student loans, credit card debt is another factor holding down home ownership and family formation. Studies show Credit Card Debt is a Relationship Killer.

  • Of all household debts, Americans find credit card debt the most unacceptable in a partner, but credit card balances are creeping higher.
  • About 43 percent off all card holders carry a balance each month according to the American Bankers Association.
  • More than 3 in 4 Americans consider too much card debt a relationship deal breaker, according to personal finance site

Overdue Debt Hits 7-Year High

The Financial Times reports Overdue US Credit Card Debt Hits 7-Year High.

Distressed debt, defined as debt that's at least three month's delinquent, totals $11.9 billion. That's an 11.5% fourth-quarter surge.

​The Financial Times also notes "More Americans are also falling behind on their mortgages, for which problematic debt levels rose 5.2 percent over the same period to $56.7 billion."

Deflationary Debt Trap Setup

These numbers are huge deflationary. When credit expands there is inflation. When credit contracts (think defaults, bankruptcies, mortgage walk-away events), debt deflation occurs.

Here's my definition of inflation: An increase in money supply and credit, with credit marked to market.

Deflation is the opposite: A decrease in money supply and credit, with credit marked to market.

Looking Ahead

  • Credit card delinquencies are priced as if they will be paid back. They won't.
  • As soon as recession hits, defaults and charge-offs will mount. In turn, this will reduce the amounts banks will be willing to lend.
  • Subprime corporations who had been borrowing money quarter after quarter will find they are priced out of the market, unable to roll over their debt.

In a fiat credit-based global setup, this is how the real world works.

Rear-View Mirror Thinking

Those looking for a huge inflation boost fail to understand credit dynamics.

Austrians who only look at money supply keep expecting pent-up inflation. The Monetarists at the Fed (central banks in general), are clueless about the situation they fueled.

Perhaps we get consumer inflation for a quarter or two, but inflation is in the rear view mirror, primarily having impacted asset prices, not consumer prices.

Rising interest rates are already starting to impact the housing market.

The auto market, home supply markets, and consumer credit in general got a temporary housing boost.

What's next won't be pretty, and almost no one sees it coming. They can't. Inflation is in the rear-view mirror.

What economists expect to happen, already has. They don't see it because they do not understand what inflation really is.

Weakening Economy

The economy is weakening and the Fed, fearing inflation is hiking right into it.

Moreover, real median wages have fallen in seven of the last eleven years!

This helps explain the falling savings rate. It certainly does not support consumption.

Debt Deflation Coming Up

I expect another round of asset-based deflation with consumer prices and US treasury yields to follow.

Mike "Mish" Shedlock

Prof Steve Keen tends to agree with you.

When your income cannot support your monthly debt payments, you individually get your Mininsky moment. People,'s just math. You can run up debt but if your asset purchases and debt are inflating too slow then you mathematically are insolvent. It's all accounting

“My folks recently sold into the great housing bubble their house for an amount greater than their entire lifetime wages. “

Which exactly, too a tee, explains why the wages of American workers have been stagnant over the same period. All the value add, that all their work and all their additional productivity has generated has, by way of Fed engineered inflation, been confiscated and handed out to “asset owners” in the form of appreciation of the exact same asset.

Of course, the workers being handed the short stick during that period, were too economically illiterate to see the scam unfolding in front of their very eyes. And, even more disturbing, they are too economically illiterate even to recognize it now, in hindsight.

Instead being played like useful idiots. Told to run around like angry, dumb stooges, blaming their fellow working men in China and Mexico. While still paying no attention to The Fed continuing their mission, of handing the wealth the workers create, to the same people who have been handed it sans effort since 1971: Idle asset owners; and privileged, produce-nothing leeches in the FIRE, legal and government complexes. Which is where you’ll find every.single.penny of wages that workers are now grumbling about been shortchanged.

Mish, I have a small point of contention with your article. It's not just banks deciding on their own to reduce lending in a recessionary environment. It's more in relation to customers/clients unwilling to take on more debt during a recession thus causing banks to reduce lending. Banks trend to create money only when there is demand for it. Why borrow against declining asset values?

The inflation issue is much more complex than is being represented here. Yes, a credit boom (inflationary) is generally followed by a credit bust (deflationary) but for each good and service the circumstances are different i.e. it is not one or other. The deflationary bust is going to, almost exclusively, impact asset prices and those sectors that are riddled with over-capacity. It is highly unlikely you are going to see deflation in healthcare and food costs, for example, and there are several other places where, for structural reasons, deflation won't occur.

... even if demand drops off markedly.

Yes. For both new and existing equity loans. The interest deduction now only applies to the primary lender.

Hi Mish, I’ve been reading headlines lately saying higher inflation is on the way, mostly due to the corporate tax cut. I read corporations pay about 340 Billion in taxes, seems like even half of that going back into the economy wouldn’t cause inflation due to the items you highlighted in your article. Look forward to any thoughts you might have. Thanks..

The folks were accidentally benefiting from the leftover crumbs showering down from the asset inflation process because they needed a place to raise their family and didn't feel like moving after the children left. In the end the rent on their assisted living apartment will consume a great deal of their profits.