Retirement?

I am not sure how true what you said about people being smarter with credit card debt is. All consumer debt levels (not just credit cards) have been rising steadily since the financial crisis in '08. And they obviously rose into it -- this has been a few decades in the making. Over the last decade alone, U.S. household debt has increased by 11 percent. ALL debt levels have been increasing to a crazy degree. It is what the Fed has tried to manufacture to create a mirage of a healthy economy over what is actually a steaming pile of dung. The average household with any kind of debt owes more than $132,000 right now -- including their mortgage (I just don't think you can separate out the types of debt). But if you want to look at just credit card debt, the average household that does carry credit card debt has a balance of more than $16,000. Add to that a car note, their mortgage, etc. and you have that $132K + number. That only works with suppressed interest rates, to keep the defaults from starting (a la 2008 all over again).

Total consumer debt is $12.5 trillion in the U.S. It's just rising steadily -- again, with rates suppressed so people don't drown in interest payments. When rates normalize, though, and markets take back control, there are going to have to be massive defaults -- unless we have some kind of unprecedented economic boom. Credit card debt is costing the typical American household almost $1,300 a year right now -- and again, that is with rates being manipulated to keep interest payments from swelling (and to encourage yet more debt). In a normal environment not being manipulated, the interest payments will kill people.

This stuff gets reported -- but mostly buried. I think it is one of the most underdiscussed things, because it has future ramifications. If we had been talking about it during the interest rate rate manipulation in the late 90s / early to mid 2000s that caused the housing boom (and the skyrocketing debt levels that created the bubbles), maybe it could have impacted people's behavior -- despite the incentives being created to get them to overly indebt themselves. We are just repeating the same thing, going on the last 8 years, we have tried to solve a debt problem (it goes beyond just consumer debt). ... by doing everything possible to create more debt to keep a necessary deleveraging from happening. Eventually, it is going to be a necessity -- the question is how big a hole we are able to dig first.

 

Here is the thing, though. ... When you suppress interest rates to encourage more and more debt (under the misguided belief that the debt fuels economic activity), you don't actually create anything productive for that debt. It creates misallocations of capital all around you -- whether you see them until it is too late or not. It creates bubbles. Theoretically, in 2006 or 2007 people could have sold their house and paid back their debt. They owned an asset in return for the debt they were carrying. The thing is, the market for that asset had been destroyed by a central planner putting their thumb on the scales of finance -- creating a mess. People were sitting with 30 year fixed rate mortgages, at say 5 percent. A low rate by historical standards. ... And they had that "asset," sure.

By 2009, though, for a ton of people, that asset was worth way less than they had paid for it (while a bubble was being created). ... and they were under water.

Our response was to to prop the housing market up with a very short-sighted response -- essentially reponding to a debt problem by creating more debt -- digging the hole deeper. But it's artificial. We needed a massive, much greater deleveraging than we got in order to get health again. It still hasn't happened. Unless you are banking on price controls in the interest rate market being able to prop up asset prices forever. ...there is no way to know what the assets you own for your debt are really be worth if reality sets in and a market is finding the equilibrium, not price controls. Maybe everything will be OK, though, and the assets people own for all that debt really will keep appreciating in value. I find it scary to bank on that sort of thing -- given the price appreciation we have seen as a result of interest rate suppression (including housing prices). It feels very artificial to me -- even if you can create a bubble over decades and create a sense of complacency.

 

Well, the good news for him. ... He is already retired. I would be completely freaked out by the mess they are sitting on if I was 10 years from retirement, but I had been paying 20 percent of what I earned into that thing. If I am sitting in retirement already, though? Not nearly as much.

 

It is probably the first place most people should look. It is tax deferred, which is a benefit. And if you have an employer that is matching your contributions, it is "free money." Given those benefits, you get bang for your buck with a 401(K) that other savings vehicles might not give you.