Why Bubbles In Optimism Can Be Dangerous?

by Victor Mozambigue
 
Bubbles in any economy are signals of eventual doom. Bubble signals from optimism have far bigger consequences. America is trapped inside a similar bubble of optimism right now. In fact, America has not seen such extremes of optimism since Ronald Regan. Americans, hopeful about making their nation great again, are bubbling with hope and how the nation would eventually become the ‘greatest in the world’. Does that sound ominous? The University of Michigan’s survey suggests that unemployment decline expectations have gone to 33 percent. It is repeating the 1984 trend, when the figures reached 35 percent. While optimism is not bad, extremes of any emotional bubble on a national scale could be disruptive given the current economic times.
Debt pressure on Americans
Americans are under severe debt pressures. Paychecks are no longer able to handle rising costs of education and even cars. Mortgage payments are not being paid as households must focus on making ends meet before they pay their debts. Consequently, the debt burden of a household is increasing the debt burden of the entire economy.


Less than half of the graduates are paying their student loans. The total amount of student loans outstanding is $1.4 trillion, of which 11.1% is delinquent. Many students have asked for reforms in their payment methods or wish to change the payment according to their income levels. Temporary payment deferment is also very common. The power of young household to get a mortgage is sharply declining.
Younger homeowners are now turning to FHA (Federal Housing Administration) loans. In fact, FHA lending is returning to its pre-crisis levels. FHA loans account for $1 trillion in debt, of which 4 percent is already outstanding for more than 90 days. Moreover, median-price homes now require a bigger chunk of median-income, approximately 22.2%, for monthly mortgage payments. These figures suggest that housing has become the least affordable in the past 7 years.
Sub-prime auto lending is fighting for scraps
Sub-prime lending was one of the major reasons behind the 2008 financial troubles. Right now, sub-prime lending business is booming. Delinquent sub-prime loans are on the rise. $300 billion of the $1 trillion loans are non-prime. Recovery rates are also experiencing a downward trend with merely 33.85% recovery in November 2016. As the sub-prime lending market is sowing seeds of its own demise, the smaller players are targeting the borrowers who have been declined by the major sub-prime lenders too. Consequently, the question of creditworthiness has gone for a toss and an alarming sub-prime lending crisis is in the making.

Mortgages and credit card debts are stretching the households but also creating more room for delinquency. Credit card debt has been growing at $5 billion per month and has outpaced income growth of the Americans. Consumer credit is now 20% of the GDP. Add the fact that 6.5 million homes have been foreclosed since 2008 and you know exactly why the happiness bubble is going to burst. Smaller household debts will add up to create a massive debt pressure in the economy. Trillions of dollars are at risk.