McAlvany Wealth Management | McAlvany Weekly Recap: 2. Borrowing Pays More Every Day – at least here in the U.S. This week, U.S. banks settled a government lawsuit regarding real estate foreclosures for $26 billion. The settlement requires the banks to reimburse homeowners that have defaulted in the last three years some $5 billion in cash settlements and $20 billion in other aid. The larger issues at hand are, of course, the growing public belief that defaulting bears no consequences, along with a degradation of contract law. The message is now that it pays to walk away from your home. It also puts one more arrow in Obama’s quiver come election time.
Below is a chart of consumer credit. We have been noting ad nauseam that the recent economic “recovery” owed its existence to both mortgage and revolving credit. Consumer credit reached a high of $19.3 billion in December, a level that exceeds pre-crisis levels of 2008.
The expansion in consumer credit underscores the weakness in the U.S. job market and lackluster gains in wages/personal income in 2011. In laymen’s terms, Americans soon won’t be able to handle the debt service. This also supports the theory of a dislocation in the markets sometime this year, QE or no QE.
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