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Growing Personal Debt Spells Potential Trouble

Jun 11, 2024

Here's something I learned while working in Washington, D.C.: when everyone seems to agree on a fact, it's time to get skeptical and go to the data. Here's a recent example. If you follow the business news, you know that consumer debt has climbed to the levels that warned the economy is headed for trouble. But what do the data say?

Looking at delinquency rates on consumer loans, sure enough, after hitting a low of 1.54% in the fourth quarter of 2021, they're up to 2.68% in the first quarter of 2024. That's a big jump. But if you step back and take a wider view, you discover that today's delinquency rate is low by historical standards. The average delinquency rate of the last 20 years is about 3%. The average rate over the past 30 years is even higher. Again, the current rate is 2.68%.

Moreover, when you look at the historical data, you see that the 1.54% delinquency rate in 2021 is a huge anomaly. Delinquencies have never been so low in the last half century. Not even close. Why were they so low in 2021? You remember those big checks the federal government mailed out during the pandemic, and how you couldn't go out of the house and spend money because of Covid-19?

What were people doing with all that income and deferred spending? One of the things they were doing was paying off debt. Massive amounts of debt. And because they were paying off debt in 2020 and 21, delinquencies plummeted by 27%, from 2.1% to 1.54%. That's the largest decline in at least 50 years. So yes, consumer delinquent assets are up and they're rising pretty rapidly, but now they're about where they were before the pandemic, when rates were at historically low levels.

So why are commenters pulling their hair out about these consumer delinquencies? I'll bet you had the same theory I have: eyeballs. Bad news sells eyeballs. Nothing is more valuable these days to media, politicians, businesses, than public attention. And nothing gets attention like bad news, even if the underlying reality is, in fact, good news.

Usually companies that sell gold talk about bad news. Almost exclusively bad news. That's because they think of gold as being a bad news buy. That was pretty much true back in the 1990s when I was mint director. But it's not true today, and it hasn't been for a very long time. Not since the economic boom of the 2000s or during the global financial crisis. Not as the Covid-19 pandemic erupted or following the Hamas attack on Israel. Not now, as we've gone through the economic and stock market rallies of the past six months

Over the past two decades, gold has performed through hard times and good times, and over the past eight months, it's up $600 an ounce, 33% in just eight months. We talk about gold as wealth insurance against hard times. Do you know of any other form of insurance that has returned 33% in eight months? I don't.

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