Realistic Ways of Resolving Debt Crises

The US economy is at an important crossroads. On the one hand, unemployment rates are at historic lows, and inflation is slowly increasing. However, US household debt levels are at untenable levels. According to statistics, the US unemployment rate is hovering around 4.3%, at a 16-year low. This bodes well for the US economy, since it indicates that only a small percentage of people are looking for work. Upon closer inspection, the underemployment rate is worrisome.

This statistic measures the number of people who are currently employed in a part-time capacity, or minimally employed, and seeking full-time employment. This figure is 8.6%. One of the most pressing concerns currently facing US households is stubborn real wage growth. As the cost of living continues to rise, real wages are being squeezed from all angles. While the Trump administration is seeking to minimize the burden of federal taxation, at state level this remains a bugbear for families.

In times of economic belt-tightening, lines of credit get stretched. Individuals and families who find themselves unable to meet their financial commitments tend to rely more heavily on credit cards, personal loans, business loans, and other options to see out the month. Given that the APR (annual percentage rate) on credit cards is excessively high, individuals tend to pay interest on interest. The Federal Reserve Bank is currently targeting a series of interest rate hikes over time, and the current federal funds rate is 1.00% – 1.25%. The probability of a rate hike is 3.3% for Wednesday 1 November 2017. And the probability of a rate hike on Wednesday 13 December 2017 is 56.4%. Given that high probability, the Federal Funds Rate (FFR) would increase by 25-basis points to 1.25% – 1.50% before the end of the year.

The Fed faces a dilemma: if it raises the interest rate, there will be repercussions for the economy – both positive and negative. A tightening of monetary policy will remove excess liquidity from the US economy and strengthen the USD. As more currency traders and speculators purchase the USD, it appreciates in value. This makes imports cheaper, but it also limits the export potential of US manufacturers.

Federal Funds Rate and Potential Solutions to Debt Problems

If the Fed decides to raise the interest rate, it will impact Main Street in a big way. It will do this through its effect on personal loans, business loans, and credit card repayments. The total value of household debt is $12.8 trillion, and the bulk of this is made up of mortgage debt at $8.7 trillion. Next in line is student loan debt valued at $1.3 trillion, and automobile loan debt at $1.2 trillion. Credit card debt remains extremely high at $1 trillion of household debt. To combat rising debt levels, solutions to the real wage problem and unemployment dilemma need to be found. However, rising interest rates will invariably raise the cost of borrowed money, and place additional burdens on US households.

In situations like this, US consumers have several options available, including debt management, debt mitigation, and debt consolidation. It is possible to negotiate with creditors for an equitable solution to debt-related problems, provided the creditors are amenable to such ideas. There is no guarantee that creditors will work with clients to offset their debt obligations. Credit counseling services may be an option, but they are limited to providing educational information about credit -related issues, money management, and budgeting.

One of the most feasible solutions for debt dilemmas is debt consolidation. This is the process by which similar debt is grouped together (such as credit card debt), and a single debt consolidation loan is taken out at a lower interest rate than the interest rate on the credit cards. These debt consolidation loans can be used to repay all the debt in one fell swoop, and the borrower enjoys a lower rate of interest. The money savings can be used to pay down the principal on the outstanding debt, and not the interest.

It’s particularly worrisome that 78% of US workers live from one paycheck to the next. In 2016, this figure was 75%. And this is not restricted to people in low income brackets, it also includes people earning $100,000 a year or more. What this means is that the cost of living is increasing, and people have upped their living standards as they move into higher income brackets. People are financing all sorts of purchases, including buying linen for beds, guitars, tickets to concerts etc. This trend needs to be watched closely, since the burden of credit card debt is fast approaching that of automobile loans and student loans.