Debt Deflation Setup: Credit Card Defaults and Subprime Auto Delinquencies Rise

Serious mortgage delinquencies are leveling off and remain one recession away from a serious upswing. Credit card and auto loan delinquencies are already on the rise.

There’s a growing rift in car debt: Delinquent subprime loans are nearing crisis levels at auto finance companies, while loan performance at banks and credit unions continues to improve, data from the Federal Reserve Bank of New York show.

Almost 9.7 percent of subprime car loans made by non-bank lenders -- including private-equity-backed firms catering to car dealers -- were more than 90 days past due in the third quarter, the highest rate in more than seven years, according to the New York Fed’s quarterly report on household debt and credit. That’s more than double the 4.4 percent delinquency rate for subprime loans made by traditional banks, a number that’s been falling pretty steadily since the end of the financial crisis.

Auto Finance Delinquencies Soar

To keep auto sales high, lenders have to accept riskier and riskier borrowers. That share is taken by auto finance companies as banks are increasingly fearful of losses.

As is typically the case, Bloomberg did not link to its source for the report. Instead it linked to a Bloomberg page with useless general information about the Fed.

Here is the NY Fed Auto Delinquency Report.

And once again, here is the New York Fed Household Debt and Credit Report.

Here are some more charts from the household debt report.

30-Day Delinquencies by Loan Type

30-Day Delinquencies by Loan Type

Report Highlights

Aggregate delinquency rates ticked up slightly in the third quarter of 2017. As of September 30, 4.9% of outstanding debt was in some stage of delinquency. Of the $630 billion of debt that is delinquent, $408 billion is seriously delinquent (at least 90 days late or “severely derogatory”). Flows into delinquency deteriorated for some types of debt. The flow into 90+ delinquent for credit card balances has been increasing notably for one year, and that measure for auto loans has increased, and the flow into 90+ delinquency for auto loan balances has been slowly increasing since 2012.

Deflationary Setup

Auto delinquencies are on a steady upswing while credit card delinquencies show a serious acceleration.

Repeating my Q&A from earlier today:

With stagnant real wages, how precisely is this debt supposed to be paid back?

Here's a hint: It won't.

This increase in unpayable debt is a very deflationary setup.

BIS Deflation Study

The BIS did a historical study and found routine price deflation was not any problem at all.

“*Deflation may actually boost output. Lower prices increase real incomes and wealth. And they may also make export goods more competitive*,” stated the study.

For a discussion of the BIS study, please see Historical Perspective on CPI Deflations: How Damaging are They?

CPI deflation is not to be feared. More precisely, CPI deflation is a benefit. Falling prices increase purchasing power by definition and thus raise standards of living.

It’s asset bubble deflation that is damaging. When asset bubbles burst, debt deflation results.

Central banks’ seriously misguided attempts to defeat routine consumer price deflation is what fuels the destructive asset bubbles that eventually collapse.

Mike "Mish" Shedlock

I've mentioned this before: Keynesians don't believe inflation has any benefit. And actually they would fully agree that CPI deflation is beneficial and asset deflation is highly destructive. It is monetarists that believe in the benefit of inflation. The Fed board members are monetarists, not Keynesians. However, I fully understand the Austrian School/Libertarian need to disparage Keynesians as they do look to the government to solve some economic problems. It's a shame that it can't be done honestly though.

The Fed is indeed more monetarist than Keynesian, but in general, both support inflation and do most of the Bloomberg writers and Academia. There is nothing remotely dishonest about that statement.

The most recent low point in aggregated delinquency rates (90 days) only fell to the same point found in 2007 or one year before the financial crash and not to the low points found in 2003+4. Ye the FED describes credit conditions as benign!!!!

We've had historically low interest rates for almost 10 years, with the big banks, stock market and the top 1% frolicking. I believe all these trends will continue given two things: 1. The Fed keep rates very low. 2. The USD continues to be the world's reserve currency. Unless and until at least one of those conditions is no longer the case, I believe the status quo will continue indefinitely, because the Fed will just paper over anything that even hints of trouble, and it will work. Will this all end well? Of course not. But that sad day may not be for 10, 20 or 30 years from now. You can say I'm being ridiculous, and maybe I am, but nobody believed this charade would last 10 years, so can someone give me an incontrovertible reason it can't go at least 10 more?

Quite possible subprime borrowers look at the auto-loan as rent with an option to put the car back to the lender. And the cars are quite often used with loan terms that can exceed the remaining life of the vehicle. While a beater would be a better decision they may be comparing their choice against renting from avis or hertz

"Delinquent subprime loans are nearing crisis levels at auto finance companies..." Ben Bernanke said those famous last words: it's confined to subprime.

"Keynesians don't believe inflation has any benefit. "

Paul Krugman identifies as a Keynesian and he certainly has argued for inflation before.

I agree with Ted. No one can say with any certainty how long the low interest rate and low growth environment will last, but it can easily be another 10 years. Sadly, the benefits of this environment do not trickle down very far to very many people.

"Paul Krugman identifies as a Keynesian and he certainly has argued for inflation before." Paul Krugman is not a Keynesian. He follows a branch called "neo-Keynesianism" which was developed by his mentor: Paul Samuelson. Samuelson fused some Keynesian thoughts with "neo-classical" economics. Samuelson and Krugman are far more market-oriented than Keynes would have ever been. Monetarism and neo-Keynesianism share the basic beliefs that the free market, if left to itself, will ultimately provide a correct level of balance between unemployment, inflation and growth. Keynes basis for his beliefs was diametrically opposed to this philosophy.