The Fed’s Rate Cut is a Response to Deteriorating Credit
Deteriorating credit – spending more than you can afford --? leads to recession and inflation. The Fed says the rate cut is a response to getting inflation under control, but it is not under control.? Most importantly, we cannot afford the interest on our growing debt at current interest rate levels. Hurray ZIRP!! The Fed has kicked the recession can down the road, again. If you can't afford to pay your promised interest, reduce that interest. The other solution is to collect more taxes.
The deterioration of credit in the USA can be attributed to? the following interrelated factors provided by Perplexity Artificial intelligence (AI). Images provided by other sources that I include in 22 Causes for the Next Crash of ’29.
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Economic and Fiscal Challenges
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1.???? Federal Debt and Deficits: The U.S. federal debt has reached unsustainable levels, with annual interest payments exceeding $1 trillion. This is not the cost of paying down the debt, but merely servicing it, and it is projected to increase further. The growing deficits and debt levels have led to downgrades in the U.S. credit rating by agencies like Fitch and Moody's, highlighting concerns about the government's ability to meet its financial obligations[2][3].
2.???? Credit Rating Downgrades: In August 2023, Fitch downgraded the U.S. long-term credit rating from AAA to AA+, citing a decline in the coherence and credibility of policymaking and the unsustainable path of fiscal policies. This downgrade reflects increased risks associated with U.S. debt and has implications for borrowing costs and investor confidence[1][3].
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Banking Sector Vulnerabilities
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1.???? Bank Downgrades: Moody's downgraded several U.S. regional banks and placed others under review due to concerns over their financial health. This has been exacerbated by changes in deposit compositions, potential credit losses, particularly in commercial real estate, and lackluster loan demand[1]. Depositors have figured out that they earn higher interest in money market mutual funds and CDs.
2.???? Increased Caution in Lending: The downgrades have led banks to become more cautious in extending credit, further constraining credit availability for businesses and consumers. This caution is expected to persist as banks navigate economic uncertainties[5].
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Consumer Debt Issues
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1.???? Rising Consumer Debt: U.S. consumers have accumulated a record $1.14 trillion in credit card debt, driven by high inflation and interest rates, which have strained household budgets. The delinquency rates on credit cards have also increased, indicating financial stress among consumers[4].
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2.???? High Interest Rates: Credit card interest rates have reached record highs, further burdening consumers who rely on credit for everyday expenses. This situation could improve if the Federal Reserve decides to cut its benchmark rate, potentially lowering credit card APRs[4].
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Broader Economic Concerns
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1.??? Economic Growth Projections: Economists forecast weak growth in household spending and business investment over the next year, which contributes to a cautious outlook on credit conditions[5]. The US spent more more than $5 trillion -- more than any other country -- on COVID. We all got checks and of course there was the "pork".
2.??? Global Economic Shocks The U.S. economy's fragility is heightened by potential global shocks such as pandemics or geopolitical events, which could exacerbate existing financial vulnerabilities[1].
Overall, these factors contribute to a complex landscape where both public and private sector credit quality is deteriorating, posing risks to economic stability and growth in the USA.
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Citations:
[1] https://www.atlanticcouncil.org/blogs/econographics/credit-downgrades-are-a-much-needed-warning/
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5 个月You do not need to be an economist to understand that spending more than you can afford is impossible and to expect it to work out " by itself," even when the Federal Reserve is artificially manipulated. It looks like this scenario was happening in history, not once...
KnowRisk Consulting
5 个月The Monetarists and Mondern Monetary Theory devotees have created a situation I think of as 'Liquidity Illusion' whereby the Fed can print its way out of trouble indefinitely. This is great in theory but as usual they have forgotten that it is Supply AND Demand that matters, The latter is starting to look a little sick. Keep a close eye on repo's ( lots of conveniently missing history on FRED website ) and other real world metrics eg https://www.reuters.com/markets/us/us-treasury-market-liquidity-back-pre-fed-tightening-levels-says-ny-fed-2024-09-23/
President & CEO Campanale Consulting Group
5 个月Right on point Ron!
Managing Partner at XT Capital Partners, LLC
5 个月Very detailed and complete
Director at Pension Research Institute
5 个月Thanks Ron, for further support for your thesis, I recommend, "Permcrisis,". Interesting that the CEO of Carlyle expects 2 more interest rate cuts this year. I wonder where they get they get that idea from?