Millions of American Are No Longer Paying Their Bills – How This Affects You
According to credit reporting company TransUnion an estimated 15 million Americans can no longer pay their credit card bills as of April 2020 due to “financial hardship.”
According to this same report, TransUnion estimates “almost 3 million” Americans are in hardship programs and can no longer pay their car loans.
And according to another report from The Mortgage Bankers Association, an estimated 4.1 million home loans are now in forbearance and no longer being paid on.
This devastating trio of financial hardship is related to the more than 40 million Americans who are now out of work due to the coronavirus.
These things combined with the continued lower economic activity will have wide ranging effects on you and the economy.
Here’s one large way this will affect banks, credit card companies, and other financial service companies… And, how their issues will affect you.
Financial Services Companies
There are some differences in the examples below, but I wanted to simplify things as much as possible for you, so you understand the importance of the examples below.
These kinds of companies run on what’s call the float or the spread.
They loan money for their own purposes at say 0.5% and then loan it to you at 1%… They make the spread or the float between these two amounts. When financial service companies do this, they create credit and debt.
Credit to them – in the form of payments received in the future. And debt for you so you can buy stuff like cars and homes without having to pay the full amount up front.
The entire world economy functions largely on this kind of credit transaction.
The less money banks and credit cards companies are paid back on the outstanding loans mentioned above – the less money they have to make new loans to people.
This makes it harder to get loans to start a business, to buy a new car, to buy a home, to get a credit card, and more.
But on top of this, these things also make it harder to fund businesses continuing to operate.
Because most companies’ day to day operations are funded with what’s called commercial paper – not cash.
Businesses use this commercial paper – short term loans – to fund things like payroll, buying equipment, buying things to turn into products and services, etc. to keep things running while they wait for cash to come in.
If the commercial paper market freezes up business activity comes to a complete stop. And this leads to even more business closures and unemployment.
This was one of the major reasons The Great Recession got so bad because the commercial paper market stopped working.
When this crisis started in Mid-March in the US, this is also why you saw the US Federal Reserve and Treasury Department pumping trillions of dollars into our financial system.
To stop this complete freezing of credit markets like what happened in 2007 and 2008.
This is also another reason why when this crisis started you saw companies slash dividends and buybacks and issue more debt. Companies did this to conserve and raise as much cash as possible when they still could in case credit markets froze up again.
With millions of people in the US now not paying their bills we’re now in danger of the credit markets freezing up again if things don’t get back to normal soon.
You can see these issues coming if you know where to look… And since no one in the mainstream media is talking about this I’ll let you know about it.
Over the past several weeks major banks in the US have begun announcing reserves for bad debt.
In this case, a reserve for bad debt means the company either knows, thinks, or expects people to not pay their bills. Which of course they do know because they can see the data about how many people who can’t pay their bills now.
Here are some recent examples of financial services companies increasing their bad debt reserves.
• Wells Fargo – now has a bad debt reserve of $4 billion.
• JP Morgan – now has a total bad debt reserve of $8.3 billion.
• American Express – now has total bad reserves of $2.6 billion.
These are just a few examples, and this is happening worldwide when it comes to companies… But this goes all the way up to country governments too.… All the way up to countries.
Japan is facing up to $7.4 billion in potential bad debt in 2020 related to the coronavirus.
China is facing up to $790 billion in potential bad debt.
And on and on.
The main thing to keep in mind with all of this is things are bad now… But they’re going to get much worse once companies start writing this debt off.
Because this lowers the companies and countries profits. And lower profits will mean even more business closures and layoffs potentially.
How should you play this?
By raising as much cash as you can personally and in your business if you’re a business owner.
We don’t know how long this crisis is going to last. But the more cash you have and can generate the longer you’ll be okay.