The talking heads on financial media are all downplaying the fact that Fitch, an international bond rating agency downgraded the US debt by a whole "A" (AA down from AAA) essentially reducing America's credit score.
As a lender I can say without hesitation that when a borrowers credit score drops their cost of borrowing capital increases. A lot.
The difference can be pretty dramatic depending on the borrower, in my experience once a borrower's credit is below a certain level the options for lending capital become significantly smaller and more expensive as lenders compensate for higher risk profile.
Here's the catch though: As the Federal reserve racks up massive debt, now standing above 30 Trillion dollars, it also "creates" zero-cost dollars increasing the total supply of dollars in the system making all of the already existing dollars, (you know; like the ones in your bank account), worth less. Not to be confused with worthless, yet. So essentially, the Federal Reserve borrows dollars today but repays the debt using tomorrows dollars which are worth less because of how diluted the pool of dollars has become from all the Fed printing.
Basically they borrow in dollars but pay in dimes or, put another way, they pay in dollars which are now only worth a dime. Nice work if you can get it.
This brings us to where we are right now facing the final months of 2023 where the US Treasury has to sell a MESS of new debt in order to keep paying the bills. September is going to see a lot of dollars crashing into the economy but none of them will be doing anything good. It's all going to service the already massive debt and, it's not even nearly enough. Simply put: Baton down the hatches folks because we're in for some bad weather.
"These factors all point toward a bubble that is in the process of popping. The situation is unsustainable, yet the Fed cannot change course without reigniting a new surge in price inflation. Any surge in prices would be especially problematic given the rising cost of living. Both new and used cars are becoming increasingly unaffordable. Ordinary Americans face a similar problem with homes. According to the Atlanta Fed, the housing affordability index is now the worst it's been since 2006, in the midst of the Housing Bubble."
Too many headwinds to be ignored but yet, the TV and all mainstream sources of economic news just keep blurting out the same nonsense
"Another day, another downgrade for America. Today it’s Moody’s Investor Service, one of the three major credit rating agencies alongside Fitch and S&P.
Last week Fitch downgraded the sovereign debt rating for the United States of America. And late yesterday, Moody’s downgraded the ratings of several US banks."
"And once repayment of student loans resumes by mandate in two months, watch out below.
Meanwhile, with average credit card interest rates rising above 22% to a new record high..."
In the private lending world demand is strong mostly because banks are pulling back. Credit scores have fallen a bit but not much, anything below 680 fico is getting either declined or receiving offers that have very high rates and short terms.
One of the concerns I have is that consumers are pulling back from spending and that's having a negative knock-on effect to all other services downstream. Mortgages and car loans make up the majority of consumer debt, now it appears credit cards are being used to fill spending gaps and that rarely ends well. Especially when rates are over 22% on average.
Businesses can absorb higher borrowing costs better than individuals because businesses have pricing power; they can increase their revenues by raising prices. Consumers are generally on incomes that can't be adjusted upward so everything they spend money on these days takes more discretionary funds out of their hands.
"FHA mortgage rates rose to 7.02%, highest rate since 2002. Rates on jumbo mortgages (greater than $726,200) rose to 7.04%."
I'm in the office all week taking requests - call me to discuss your plans. I return all calls and emails, have a great week and God Bless!