Bankruptcy & Foreclosures

In my last post I did my best to convince you that rising interest rates aren’t evil in and of themselves. In fact, after much digging, it turns out that there are others out there in cyber space who agree with this assessment and hence provided me with some valid truths about the way the world works.

This time let’s dig into how inflation affects some other aspects of daily living. Sure you saw it first hand the last time you filled up at the pump or got to the cash register at the supermarket when what you spent a few months ago netted you half the groceries but have you given a moment’s thought to the fact that hospital costs have risen 8%? Worse yet is that the Fed’s response to pump more money into the economy means that even if the economy gets its well-needed boost, inflation may be here to stay.

So here’s the good news- there are a few realities to consider in times of inflation. This is the era of the tangible good. As inflation rises and the value of the dollar sinks, tangible goods have an edge over securities (especially bonds). Blame it on the human condition if you must, but there is simple logic in the appeal of goods (gold, gems, diamonds, antiques, art, etc.) over paper. In rough waters, it is the anchor that keeps us feeling safe and secure and in this case that anchor comes in the form of intrinsic worth that doesn’t fluctuate, even as paper money loses its value.

In addition, fixed rate loans suddenly become much more appealing in times of rapid inflation. Lenders know it and regret not selling you a variable rate loan when they had the chance. What’s the logic here? Simple: You’ll repay a fixed number of dollars every month, even as the dollar’s value tumbles to less than it was when you took out the loan. Not the case with ARMs (adjustable rate mortgages), adjustable home equity lines, and most of all credit cards! To make up for the fact that the dollar is worth less, all it takes is a rate hike to make up the difference to the lender.

While tactics of credit card companies are often considered predatory at the very least, Uncle Sam has announced on Friday that things are about to improve for the little guy if their proposals are put into action. The Federal Reserve and other regulators have begun a crack down on unfair and deceptive practices that currently reign supreme in the credit card industry that have added billions of dollars of debt to individuals already struggling to cope with poor economic conditions.

In the most wide spread governmental crackdown on the credit card industry in decades, the Fed, in conjunction with the National Credit Union Administration and the Office of Thrift Supervision, is proposing a regulation that would, in its simplest form, put an end to the credit card company’s ability to unfairly raise interest rates. In addition these regulations would make certain card issuers give people enough time to pay their bills. Naturally, the banking industry is expected to fight these new rules.

So exactly what is the Fed proposing? The new rules would prohibit the following:

Unfairly allocating payments among balances with different interest rates.

Unfairly raising annual percentage rates on outstanding balances.

Unfairly adding security deposits and fees for issuing credit or making credit available.

Unfairly computing balances.

Placing unfair time constraints on payments.

Placing too-high fees for exceeding the credit limit solely because of a hold placed on the account.

Making deceptive offers of credit.

Representatives from the American Bankers Association have already announced plans of fighting these new proposals under the defense that such regulation does not allow the lender to base pricing on the risk of the individual borrower. In other words, if high-risk borrowers aren’t forced to incur higher interest rates, the burden is then spread evenly to customers in good credit standing.

With modest estimates claiming credit card debt to the tune of $850 billion it’s no wonder the Fed has taken note. What’s worse is that households that don’t pay their credit card bills in full every month owe an average of $17,000. The American mentality of charge now/ worry later has finally been catching up to many individuals on account of recent economic turmoil. For many, it looks like the time to worry is now and hopefully the Fed’s plan of attack isn’t too little too late.

Well, we Americans are nothing if not persistent. According to a recent report released by the government, incomes are slowing, inflation is increasing and yet, Americans are still spending. The Fed would know too, as consumer spending accounts for more than two-thirds of the country’s economic activity and is closely monitored as a gauge of the economy’s health as a whole.

This is especially interesting considering that reports also conclude that consumer confidence has dipped to all time lows. Uncertainty about inflation is on everybody’s mind, or so it would seem. And yet it is our resilience when it comes to blowing our dough that has prevented the economic state from plummeting into a deeper state of recession, or worse yet, into a full blown depression.

Here’s the disturbing news - if incomes aren’t increasing, prices are and spending remains the same - something has got to give right? Well it turns out it’s our collective savings account that’s taking the hit. Personal savings increased by a mere 0.2% in March (down from 0.4% the month before). Let’s put this into perspective: For every $1,000 that Americans bring in (after taxes), they are saving a whopping $2. Ouch!

According to the New York-based Conference Board, its Consumer Confidence Index dropped to 62.3, the lowest level since March 2003 (down from 65.9 in March). However, considering all of the negative economic news of late (my blog included) devoted to rising food and oil prices and record-breaking numbers of foreclosure, the fact that the nation’s gross domestic product hasn’t shrunk in the first quarter is a victory we’ll cling to for dear life.

Officials expect consumer spending to weaken when April’s numbers come in, but expect the following three months to show an upturn in consumer spending thanks in no small part to the government’s stimulus plan.

Considering that we’ve proven we don’t care much for saving our money these days, it looks like the government’s insistence that we pump the stimulus money back into the economy just may happen after all.