Category Archives: Debt

Chinese Communist Government Economic Strategies Baffle Economists

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In the capital city of Beijing, the Chinese Communist authoritarian regime is grappling with the harsh reality of self-inflicted economic struggles.

The ongoing real estate crisis in China presents a significant challenge to the Communist Party, with industry giants like Evergrande and Country Garden facing liquidation orders. Chinese citizens heavily were invested in real estate, with approximately 70 percent of their investments allocated to this sector, twice the amount seen in the United States.

The long-term real estate fundamentals have changed — China’s population has likely peaked, urbanization is slowing and home ownership is already very high.

Moreover, official economic figures released by the People’s Republic are often met with skepticism from experts, who believe gross domestic product (GDP) numbers are fantasy. For example, Foreign Policy reported that China’s economic growth in 2023 may have been significantly lower than the stated 5.2 percent, possibly around 1.5 percent.

China’s overall debt-to-GDP ratio is about 300% and rising, which is the highest among emerging markets and higher than most advanced economies. While China’s central government debt is relatively small at just above 20% of GDP, debt at the local government level is estimated to be more than 70% of GDP.

A debt crisis is typically a liquidity crisis  

Additionally, China’s government has substantial assets that can help pay debt. More importantly, a debt crisis is typically a liquidity crisis, and in the case of China, high domestic saving kept by capital controls at domestic banks means that more than 95% of China’s debt is domestic debt, financed by relatively stable domestic deposits and not subject to sentiment change of international investors.

Despite the Chinese Communist regime’s message of China being “open for business” to the global business community and financial elites, the reality paints a different picture. Beijing’s autocratic government enacted a draconian law that requires domestic and international companies operating in China to share business secrets and intellectual property with the Communist Party. This policy has raised concerns about the country’s investment and business environment. While the intention behind such measures may be national security and autocratic control related, it also poses challenges for companies operating in China.

Bottomline, the Chinese economy is plagued by a litany of challenges.

Local governments are struggling with financial difficulties after three years of pandemic spending and declining land sales. Some cities in China can’t repay their debts and have hadto cut basic services or reduce medical benefits for seniors.

The real estate crisis has deepened. Plunging home sales have pushed developers like Country Garden to the brink of collapse. The crisis has spilled over to the massive shadow banking sector, causing defaults and sparking protests across the country.

Youth unemployment has become so bad that the government stopped publishing the data.

Foreign companies have grown wary of Beijing’s rising scrutiny and are pulling out of the country. In the third quarter, a measure of foreign direct investment (FDI) into China turned negative for the first time since 1998.

Foreign investors beware when investing capital in an communist and autocratic country.

References:

  1. https://www.msn.com/en-us/news/world/xi-s-economic-strategies-baffle-even-chinese-economists/ar-BB1jpZa9
  2. https://www.npr.org/2023/08/16/1193711035/china-economy-tao-wang-interview
  3. https://www.cnn.com/2023/12/27/economy/china-economy-challenges-2024-intl-hnk/index.html

U.S. Gross National Debt

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U.S. Gross National Debt exceeds $34 trillion.  

The federal government’s gross national debt has surpassed $34 trillion, a record high that foreshadows the coming political and economic challenges to improve America’s financial balance sheet in the coming years and decades.

The U.S. Gross National Debt is on an unsustainable path of growth, interest costs are exploding, and the Social Security and Medicare trust funds are approaching insolvency.

Source:  Committee for a Responsible Federal Budget

U.S. Credit Card Debt

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  1. Total U.S. credit card debt reached an all-time high in the first quarter of calendar year 2023, reaching $1.03 trillion, according to data released Tuesday by the Federal Reserve Bank of New York.

Rising credit card debt and auto loan balances helped to drive overall household debt levels up 1%, to $17.06 trillion for the quarter, the report showed. Overall household debt has spiked by $2.9 trillion since the end of 2019, before the pandemic.

Key facts:

  • The average American credit card debt balance is $5,910, as of the third quarter of 2022, according to Experian.
  • Americans have an average credit utilization rate of 28%.
  • Credit card interest rates have reached an average of 20.92%.
  • White Americans have the highest average credit card debt of any racial group at $6,940.
  • Higher earned income corresponds to larger credit card balances, but consumers in the middle income brackets are the most likely to have credit card debt.

References:

  1. https://www.fool.com/the-ascent/research/credit-card-debt-statistics/
  2. https://www.cnn.com/2023/08/08/economy/us-household-credit-card-debt/index.html

U.S. Federal Public Debt

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As of September 30, 2020, 64 percent of the outstanding amount of marketable Treasury securities held by the public (about $13.1 trillion) was scheduled to mature in the next 4 years. Current coupon rate is around 2,5 percent

During the past decade, the federal government’s debt increased at a faster rate than at any time since the end of World War II, outstripping economic growth over that period. At the end of 2019, federal debt was higher than at any other time since just after the war.

When the federal government runs an annual budget deficit, the Department of the Treasury borrows money to make up the difference between spending and revenue. Then, if special funds like the Medicare trust fund have surpluses, the “extra” revenue is lent to the rest of the federal government.

The federal debt is the total amount of money that the federal government owes, either to its investors or to itself. Total federal debt rose to $26.9 trillion at the end of fiscal year 2020, equal to about 79 percent of GDP, a higher percentage than at any other time since just after World War II.

To finance the government’s activities, the Treasury issues securities—collectively labeled debt held by the public—that differ in time to maturity, the ways they are sold to investors, and the structure of their interest payments. Marketable securities make up the lion’s share of that debt, and nontradable securities, such as savings bonds, make up the rest.

The Treasury sells securities in the capital markets—often through a primary dealer intermediary­—to various U.S. buyers (such as the Federal Reserve System, mutual funds, financial institutions, and individual people), to private investors overseas, and to the central banks of other countries. Domestic investors currently own about three-fifths of outstanding debt held by the public.

Federal Fiscal Deficit vs. National Debt

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Democrats spend money when they don’t raise taxes; and, Republicans cut taxes when they don’t decrease spending. Tax and spending reforms are needed desperately.

“The government has basically three gigantic programs and it’s the US military, Social Security, and Medicare,” Marc Goldwein, a senior policy director at Committee for a Responsible Federal Budget (CRFB) said. As Nobel-Prize-winning economist Paul Krugman once wrote, the US government is “best thought of as a giant insurance company with an army,” and increasing interest payments.

If the government wants to get serious about its fiscal spending and reducing the national debt, all government spending would have to be reduced by 27% to get budgets balanced in the next decade — and, if tax increases, defense spending, Social Security, and Medicare are all off the table, 78% of federal spending would have to be cut, according to CRFB.

The federal deficit vs. Debt — they’re two separate concepts.

  • The deficit is the difference between the money that the government makes and the money it spends during a fiscal year. If the government spends more than it collects in revenues, then it’s running a deficit.
  • The federal debt is the running total of the accumulated deficits.

The combination of spending increases, tax cutsc, and increasing interest expenses on the debt inflates deficits. While the rise in spending tends to be bi-partisan, tax cuts tend to be enacted by Republicans.

Reference:

  1. https://news.yahoo.com/want-balance-budget-without-raising-100000676.html
  2. https://www.politifact.com/factchecks/2019/jul/29/tweets/republican-presidents-democrats-contribute-deficit/

Federal Student Loan Forgiveness and Taxpayers Burden

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In truth, the federal student loan debt forgiveness plan does not forgive any debts. Instead, it transfers the debt obligations from borrowers to U.S. taxpayers.

U.S. President Joe Biden’s plan to forgive federal student loan debts is a misnomer. The plan does not “forgive” or eliminate the student loan liabilities, it only transfers the obligations and enormous burden from the millions of individual borrowers to the U.S. taxpayers at an projected cost of $400 billion or more. And, you can be almost certain that $400 billion projected figure is a low balled amount.

Student loans are one of the biggest areas of consumer debt in the United States.

As of the fourth quarter of calendar year 2022, there were $1.60 trillion in outstanding federal student loans, versus $1.55 trillion in outstanding auto loans and  $986 billion in credit-card debt, according to the Federal Reserve Bank of New York, reports Barron’s.

About 26 million Americans have applied for student loan forgiveness since August 2022, and the U.S. Department of Education has already approved requests from 16 million borrowers.

The program forgives $10,000 of debt held by the federal government for individuals who make less than $125,000. It also forgives $10,000 of debt for couples that make less than $250,000, and it forgives up to $20,000 of debt held by Pell Grant holders, who are mostly lower-income borrowers.

References:

  1. https://www.reuters.com/world/us/whats-latest-bidens-us-student-loan-forgiveness-2023-02-28/

Federal Spending and U.S. National Debt

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In response to the COVID-19 pandemic, more than 50% of increased federal government spending between 2019 and 2021 was for assistance to individuals, which more than tripled to $1.1 trillion in 2020 and increased by another $300 billion in 2021, according to USAFacts.

In fiscal year 2021, the federal government spent 68% more than it collected, resulting in a $2.8 trillion deficit. The deficit decreased from fiscal year 2020 when the federal government spent 91% more than it collected.

Most federal government spending happens in two ways:

  • Direct spending on federal programs (such as for the military and social security) and
  • Indirect spending through transfers to state and local governments in the form of grants (such as for infrastructure) that those governments then spend. State and local governments raise money both through federal grants and revenue raised through state and local revenue sources.

Source:  USAFacts

The National Debt Limit

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More than half of the U.S. National Debt is owed to the US public and more than one quarter is owed to foreign entities.

The debt limit, or debt ceiling, is a restriction on how much the federal government can borrow to pay its bills and allocate funds for future investments.

When Congress appropriates or directs government money to be spent, the government is obligated to pay those funds, creating a bill it must pay. The federal government spent 68% more than it collected in fiscal year 2021, resulting in a $2.8 trillion deficit. The deficit decreased from fiscal year 2020 when the federal government spent 91% more than it collected, according to USAFacts.

This bill, also known as the national debt, is the amount of money the federal government has already borrowed to cover outstanding expenses in past fiscal years.

The national debt is composed of debt held by the public in the form of government securities and intragovernmental debt, debt which one part of the federal government owes to another.

The U.S. Gross Domestic Product in December 2022 was $26.13 trillion, according to the Bureau of Economic Analysis. The Gross domestic product (GDP) is the value of all goods and services produced in the US. This number is used to measure the health of the economy by observing when GDP is growing or shrinking.

The U.S. National Debt ceiling is currently set at $31.4 trillion.

In December 2021, Congress increased the debt ceiling to $31.38 trillion.

When the national debt exceeds the debt ceiling, the federal government cannot increase its outstanding debt any further. Therefore, the Treasury Department can use extraordinary measures authorized by Congress to manage the federal government’s finances and remain under the debt limit.

These measures can include suspending investments into government saving, retirement, and health plans, halting the sale of Treasury bonds and other government securities, or shifting money between government agencies to pay off intragovernmental debts.

Source:  USAFacts.

More Than One in Four Americans Say Their Debt is Unmanageable

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Nearly one in five Americans are feeling bad or very bad about their financial circumstances. ~ OppFi’s 2022 Personal Finance Study

The FinTech company, OppFi, surveyed nearly 1,100 Americans to learn more about Americans’ financial situations,.

Respondents had mixed and uncertain feelings about where they stood financially, with nearly one in five feeling bad or very bad about their circumstances.

Key takeaways

  • Half of respondents to the survey are currently in debt, and 52% of those in debt say their debt is not manageable.
  • Just over 1 in 3 respondents have frequently experienced stress or anxiety about their finances since the COVID-19 pandemic started.
  • 1 in 4 took out a personal loan during the COVID-19 pandemic, most often to cover basic necessities such as food, clothing, and housing and credit card debt.

Americans’ financial health is often measured by benchmarks such as debt, savings, spending habits, and the ability to pay their monthly bills, writes Ashley Altus, CFC, a personal finance writer for OppU. OppFi survey respondents reported having difficulty with many of these things. Half said they’re in debt, and nearly half said they can’t pay their bills on time. Almost 2 in 5 live paycheck to paycheck, and 1 in 5 said they spend more than what they earn.

Budgeting is widely considered an important aspect of personal finance, but 1 in 10 said they didn’t have a budget at all.

Fewer than half (47%) said they have a savings account or emergency fund. Of those who did, nearly 1 in 5 said they could live off it for three weeks at the most.

How COVID-19 impacted Americans’ financial situations

The COVID-19 pandemic threw the American economy into chaos, with numerous businesses closing. In April 2020, the unemployment rate reached a level not seen since the 1930s. Near the end of 2021, 10 million households were behind on rent despite three rounds of stimulus checks.

More than half the people we surveyed said the pandemic worsened their financial situation. The biggest reason? Employment – more than 1 in 5 were working fewer hours and 15% lost their job. Others cited their own illness (17%), and 15% said their credit score decreased.

Financial stressors

One result of financial difficulty may be stress. Just over 1 in 3 respondents said they have frequently experienced stress or anxiety related to their finances since COVID started, with the most common stressor being paying bills other than mortgage or rent (cited by 35%). Debt was identified as a source of stress by 28% and 26% were stressed about not having enough savings.

Other stressors included basics like having enough food, high energy or gasoline prices, and paying mortgage or rent. Financial anxieties also reach as far as retirement, with more than 1 in 10 saying they’re worried they won’t have enough to retire on.

References:

  1. https://www.opploans.com/oppu/articles/personal-finance-study-2022/

Credit Score

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Credit scores are mathematical formulas that help lenders determine how likely you are to pay back a loan. Credit scores:

  • Range from 300 to 850.
  • Are not based on your income.

Here’s a breakdown of all the factors that affect your scores, according to Nerd Wallet:

Payment history. Your credit reports reveal your payment history, or whether you’ve consistently paid bills and other obligations on time. FICO says payment history accounts for 35% of your score. Paying bills late by 30 days or more can dent your scores — and the later you pay, the greater the damage.

Credit utilization The amount of your credit limit you use, expressed as a percentage, is called credit utilization. FICO says the amount of available credit you use counts for 30% of your score.

Other credit score factors you should know about

Other credit factors that also affect your scores include:

  • The length of time you’ve had credit: Longer is better, so keep old accounts open unless there is a compelling reason to close them, such as an annual fee on a card you no longer use.
  • The kinds of credit you have, or credit mix: It’s best to have a mix of installment accounts — those with a set number of equal payments, such as car payments or mortgages — and credit card accounts.
  • The length of time since you’ve applied for new credit: Each application that causes a hard inquiry on your credit may take a few points off your score.
  • Total balances and debt: It’s best if you’re making progress in paying off your debt.

Factors that don’t affect your credit score

  • Checking your own score: If you get your own score through your bank or a free credit score service, it does not affect your score. That’s because checking your own score is considered a soft pull on your credit. You can check it as many times as you want with no impact to your score.
  • Rent and utility payments: In most cases, your rent payments and your utility payments are not reported to the credit bureaus, so they do not count toward your score.
  • Income and bank balances: Credit reports do include some employer information, but it’s used only to match account data to the right person. Getting a raise won’t bump up your score, and it is possible to build credit on a small income. And since reports list only credit accounts — not savings, checking or investment accounts — your balances in those also won’t help your score.

Want to raise your credit score? Here are some tips!

  • Start by checking your score (for free).
  • Tackle your debt, even when you can’t pay very much.
  • Avoid asking for more credit.

It’s an often repeated myth that keeping a balance when using credit cards will raise your credit score. The truth is that paying on time, every time, is what’s good for your credit — and paying in full is the most economical, because it lets you avoid interest, explains Nerd Wallet.

It’s important to put at least some of your spending on a credit card from time to time, but spending more will not benefit your score. Aim to use no more than 30% of your credit limit on any of your cards, and less is better. That’s because the second-biggest influence on credit scores is credit utilization — the portion of your credit limits you use.

To keep your credit utilization low, you can:

  • Sign up for balance alerts via text or email from your credit card issuer so you can stop using a card if the balance gets close to 30% of the limit.
  • Consider making several payments throughout the month to keep balances low.
  • If your credit is good or your income is up since you applied, ask for a higher credit limit. This will lower your credit utilization by bumping up your total credit limit, as long as your spending stays the same.
  • Think twice about closing old or little-used cards, because they contribute to your overall credit limit. Your credit utilization could shoot up due to the loss of available credit from a canceled card.
  • You could also increase your available credit by opening a new credit card, but it’s important to research the best credit card for your financial needs before applying.

Checking your credit score

There are several ways that you can check your credit score for free. A great place to start is to check if your bank or credit union offer this service for its customers. Additionally, each of the three credit reporting agencies (Experian, Equifax and Transunion) allows you to check your credit score for free.

Everyone is entitled to one free credit report a year from the three agencies at annualcreditreport.com, according to the federal government.

References:

  1. https://www.nerdwallet.com/article/finance/credit-score-does-carrying-a-balance-help
  2. https://apnews.com/article/business-0a536993ce494fc8d6fe2c5d637da5b5