We are certainly heading for another economic crash. The signs of it are not hard to find. Here is one: "6.3 million Americans are 90 days late on their auto loan payments." This is up 400,000 from last year. The Chicago Tribune story also provides evidence for a prediction I made in 2015: "America's Next Subprime Crisis Will Be Car Loans." What was noticed by some economists, but mostly ignored by mainstream media, is that car loans were getting longer and therefore created the illusion of being affordable (though their interest rates were higher). This made expensive cars accessible to people with low credit scores. These loans have been packaged and their revenue stream sold to yield-hungry investors.
From the Chicago Tribune:
Some have started to compare what's happening in the auto loan market to the home mortgage crisis that helped trigger the Great Recession and financial crisis of 2008-09. Many of the same issues are back: Lenders appear to have lowered their standards to give people car loans who probably should not qualify or should not be getting such a large loan. For example, a man in Alabama was able to use his shotgun to cover most of the down payment when he took out a car loan.
Expect more cracks like this to appear in the economy, which, at the moment, is feeding a gigantic stock market bubble. The scale of this bubble explains the desperation to pass tax reforms. Much of that money will not go into the conventional economy, but right into the ether of Wall Street—the only game in town, if you are rich. In this respect, tax reform is really a continuation of quantitative easing.
It must be understood that the stock market has been overvalued since quantitative easing was implemented by the Federal Reserve Bank near the end of 2008. Over the past nine years, this monetary policy provided the wealthiest Americans with $3.5 trillion in government support. Without that aid, their paper would be worthless.
From Business Insider:
Ten years ago, before the collapse of Lehman Brothers rocked global financial markets, the Fed’s balance sheet stood at $925 billion—mostly U.S. Treasuries. After fifty-nine months of asset purchases [QE] to push down longer-term interest rates, it had ballooned to a peak of $4.5 trillion, including nearly $1.8 trillion in mortgage securities, in October 2014.
Now that QE is running out of steam, the markets need the tax cuts, which will transfer $1 trillion or more from the rich to public debt. But if you are a rational expectations type of economist and model-maker, you will be distressed because the markets, according to this philosophy, have already anticipated, bet on, and absorbed that next supply of government cash. But the cost of climate change is certainly not baked into the stock market. This hurricane season will cost around $200 billion. More violent hurricane seasons and extreme weather events will severely stress the public purse. But our fiscal situation, which has not fully recovered (and is still loaded with debts) from the Great Recession, has no room for shocks.
There will still be what remains of Obamacare and Social Security. But while those hills are attacked by GOP politicians who are under unremitting pressure from their biggest donors, something small like a very sharp increase in car loan delinquencies will shake the holy ghost out of investors. Massive debts from the previous crash, QE, the tax cuts, and climate disasters will make bail outs politically unfeasible. Some creditors will have to go under. And then it begins again: An abrupt shift to liquidity preference—cash over financial assets; confidence collapses; the diversity of portfolio assets dissolves; the coefficient correlation becomes +1 (a perfect correlation); the market becomes one massive mudslide; and we watch in horror as our economy falls right past the bottom it hit back in September of 2008.
The question is: Will the world buy US debt this time around? It did after the crash of 2008, and that's why much of the worst was avoided, why it became the Great Recession and not the Great Depression. But imagine the mood of a world that has been mocked and harassed and insulted by Trump. Will this world be eager and quick to buy the obligations of this president's country? This unknown should worry you more than the HQ2 circus.