How will the fed deal with this problem?
Apparently income is falling and inflation is picking up. Also disturbing is the news that, "The personal saving rate was 1.0 percent in January, indicating that Americans were setting aside 1 cent from each dollar earned. That was down from 3.6 percent in December." What do you do to tame inflation when people are earning and saving less? Raising interest rates could have catastrophic ramifications.
The new factor to consider when assessing the risk of an economic meltdown is the HELOC (home equity line of credit, usually a variable rate second mortgage). When the prime interest rate was around 1% people started to buy all kinds of luxuries with their new found credit. Now interest rates are increasing the HELOC is becoming more and more difficult for families to pay.
Credit card interest rates have also dramatically increased over the past 2 years. My credit card has gone from 9.5% in 2003 to 19.2% in 2005. The reason for this increase isn't late payments (I don't keep a balance), it's a change in the prime rate and, according to a customer service representative, a policy change.
I would feel more comfortable about the direction the economy is taking if I thought there was a plan, beyond raising interest rates, to spur wage and savings growth.
The new factor to consider when assessing the risk of an economic meltdown is the HELOC (home equity line of credit, usually a variable rate second mortgage). When the prime interest rate was around 1% people started to buy all kinds of luxuries with their new found credit. Now interest rates are increasing the HELOC is becoming more and more difficult for families to pay.
Credit card interest rates have also dramatically increased over the past 2 years. My credit card has gone from 9.5% in 2003 to 19.2% in 2005. The reason for this increase isn't late payments (I don't keep a balance), it's a change in the prime rate and, according to a customer service representative, a policy change.
I would feel more comfortable about the direction the economy is taking if I thought there was a plan, beyond raising interest rates, to spur wage and savings growth.
posted by mochi at 7:18 AM
2 Comments:
Lets review:
1. Income falling.In the article you mentioned, the paragraph after this "CATASTROPHIC" headline read "The Commerce Department said personal income fell 2.3 percent in January after hitting a record in December on a big dividend payout by Microsoft Corp. Excluding that one-time impact and other factors, personal income rose 0.5 percent in January compared with a 0.6 percent gain in December". This means that income rose minus a gigantic divident paid out by a very rich corporation.
2. inflation is picking up.inflation picking up is a good thing. Lowered interest rates brought on the danger of deflation. Raising interest rates can be used to lower inflation, but the two go hand in hand.
3. HELOCPeople who took out a second mortgage and blew it on Escalades and "everyday purchases" just didn't know what they were doing. Maybe they got manipulated into it, but I think there are plenty of people who took those HELOCs and improved their homes and cut down on other debt. Now if the HELOC payment goes up they may just end up in the same boat as before.
4. your credit cardYou must be kidding. If your card goes up liek that, jsut open a couple of those hundreds of envelopes you get in the mail every week. Pick the best 0% offer where you are pre-approved and has the longest 0% period and get that card. Then close the 19% one. Credit cards claim they want you to be their member for a long time. But in the end, they offer no rewards for staying a member for a long time if all you want is to financy a grand or 2 over a few months. Good luck with that.
Huh? My point was that if incomes don't increase with increases in interest rates to tame inflation then how can people afford to pay their debts?
Great strategy, instead of paying down debt I should shuffle it around between 50 credit cards. Thanks for that.
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