In the last two and half decades the two credit-tightening cycles have seen the central bank of the US hike base interest rate 108% in the 1990s and 425% in the mid-2000s. Despite household savings going into the cycles being higher and debt levels being lower than the current situation, both cycles ended in recession with over 50% stock price losses.
Poor risk management and excessive spending catalysts of recession
When it comes to financial depression the catalyst is not the normalizing of standards and lending rates. Recessions are normally fuelled by excessive spending, periods of low standards as well as poor risk management preceding the financial downturn. The period between then 2008 recession and 2018 will go into the history books as an all-star cycle.
Since the last global financial crisis there has been a 15% year-on-year growth in household interest payments which has equalled the rates preceding the previous two cycles. Despite the base rate remaining below 43% of the last cycle highs, surprisingly there is uncertainty in consumption-based economies such as the US that is struggling as well as Canada.
The US economy feeling the effects of the credit cycle
The US economy which is consumer based is shrinking and it is starting to appear less like a growing economy. It remains to be seen whether the effects are a result of the details of the GDP report in the first half of the year or it is a result of personal spending and this trend is expected to continue in the coming months which spells doom.
As a result of uncertainties credit card holders are boosting their cushions so that they can be able to absorb any losses and in the first quarter of this year card issuers increased their charge off rates by 3.82%.equally mortgage lenders are also feeling the pinch and for the first time since the last recession they have seen a 15% decline in delinquency rates which is the smallest in over a decade.
This credit cycle is regressive regardless of if we are ready for it or not and people should plan ahead to cushion their saving from losses while at the same time maintaining liquidity purchase assets on discount immediately the cycle lows begin
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