We like to take a look at data in different ways often magnifying or shrinking data points to try to get a better understanding of what data is trying to tell us. To that end, we wanted to look at consumer credit against the Federal Reserve funds rate.
One thing to note is that we multiplied the Fed Funds rate by 100 to scale it to the consumer credit numbers otherwise it would be a minuscule line at the bottom. From 2000 thru 2010, the Fed funds rate had little impact on consumer growth. The average rate of growth was 0.3 percent during that time frame! From 2010 thru 2020 the growth rate in consumer credit doubled to 0.69 percent with a huge one time jump in 2010 as depicted in the graph as the Fed lowered rates to near zero.
An interesting data point to note is that the Federal Reserve setting rates to zero or near zero will only result in credit growth of 0.69 percent. There are deep implications about future Fed actions in trying to recover from a massive default in the future that we won’t get into here.
Uncharted Country
The curious thing about the chart is that interest rates are rising as so is consumer credit. Under normal conditions it should be expected that HIGHER interest rates would result in LOWER credit and loans but that’s clearly not the case here.
The key difference, we think, is the high rate of inflation that is distorting consumer credit demand. It is clear that most consumers in the United States are charging goods and services even when the cost of borrowing is increasing. If this trend continues it will likely lead to huge credit defaults at some point down the line.
Will it be a repeat of 2008? If so, what’s the best way to invest? If not, where do we go from here?
Stay tuned and stay solvent…