economics

Credit Card Followup

In a follow up to the credit card post, let’s look at the math of credit card rates. Interest rates on credit cards only matter if you carry a balance on them. Nearly half of credit card holders (47%) carry a month to month balance. Who carries this balance?

  • more than half of Gen Xers (ages 46-61; 53%)
  • millennials (ages 30-45; 53%),
  • 2 in 5 boomers (ages 62-80; 43%)
  • Gen Zers (ages 18-29; 40%)

The average balance for credit cards where the owner does carry a balance is $6700.

Why do the users carry a balance? The largest single reason is they aren’t properly managing cash flow and spending beyond their means, which forces them to use credit cards for everyday expenses.

According to the Federal Reserve, 82% of American adults have at least one credit card. However, it’s common to have several cards in your wallet. On average, people have 3.9 cards.

My wife and I are super prime users, and we spend about $40,000 per year on credit cards. We use them for everything: utility bills, groceries, you name it. Once, I even made a $20,000 down payment on a car with a credit card. The difference is that we pay the balance off every month. Why do I do that? Rewards.

My Amazon card pays 5% cash back. Our joint card that we use for daily expenses? 5% cash back on fuel and restaurants, and another card gives us 7% credit for use on vacations. It’s all about maximizing our cash back returns. It’s like giving yourself a raise. As for us, that $40,000 a year in card use gets us about $1500 a year in rewards and freebies.

You just have to make sure you don’t carry a balance. That means spending within your means and not carrying a balance. The nationwide average APR on general-use credit cards is 21.91%, which means interest adds up quickly.

Among those who carry a balance, more than 7% of them are more than 90 days past due. So do the math from the other post- people with lower credit scores (below 700) spend the least, but are the most likely to carry a balance and most likely to become seriously delinquent and default.

So Trump’s rule of requiring credit card rates to be capped at 10% will cause credit card limits and availability to be greatly restricted. People will move back to cash, and will have to use debit cards for online transactions. This will in turn do three things:

  • It will force people like me to stop taking advantage of rewards, because they will no longer be available. I, and other prime and super prime users, will have to switch back to cash.
  • Prime users with scores between 700 and 749 will have restricted access to cards, and even then, those cards will have very low spending limits, likely $1000 or less.
  • Credit cards will simply not be available to those with a credit score below 700. This will force these subprime borrowers into more expensive payday loans, which carry interest rates of more than 300%.

The hit to online vendors and shopping will be enormous. Amazon, as the world’s largest online retailer with $400 billion in annual online sales, will be especially hard hit as people lose access to easy digital funding sources.

Likely, this will eventually settle into digital currency becoming more popular. At that point, I will have to reevaluate my opinion of things like bitcoin.

Just remember- price controls NEVER work as intended. Where there is market demand, the market will find a way to supply that demand.

By Divemedic, ago

Supply and Demand

People don’t understand how market forces work, and that is true on both the left AND the right. The price of anything: food, houses, cars, even your labor is set by market forces.

Michael Jordan got paid what he was paid for two reasons: no one else could play basketball at the level he played the game. The pool of talented basketball players was very small- there are less than 600 people in the entire country that can play basketball at an NBA level, and Jordan was the only person playing at the level he was playing at. So there is your supply- very limited.

The demand for him was huge- people wanted to watch the man do what he did, and they wanted to be like him so much that they bought millions of shoes simply because Nike put his name on them. That is your demand.

The same is true for houses, cars, food, or anything else for that matter. Right now, my wife wants to buy a car. She has her mind set on a specific car, and is very particular about what she wants. She wants a Lexus TX350 AWD with the Luxury trim package, a dark outside color, and any interior that isn’t white. Guess what? Demand for that vehicle is so high, the dealers are selling them sight unseen before they even arrive from the factory. You can’t special order them, because the factory is so busy trying to meet demand, that they don’t have the capacity to do custom orders. Because demand is so high, dealers charge sticker price, take it or leave it. If you don’t like it, go buy something else, but make no mistake, as long as the Lexus vehicles are selling so quickly, you won’t see deals or reductions in price.

Apply the same to houses- people want to buy houses, and the demand curve is being altered by large investors buying thousands of homes to use as rentals. Demand is high, so prices climb. Why are investors buying so many rentals? Because demand there is pushing rental rates to climb, because so many illegals have entered the country, and they all need places to live.

So more illegals= more renters. More renters=higher demand and increased rental prices. That equals more profits, which draws in more investors to meet that demand. Those investors are buying themselves rental property, which is causing a decrease in supply for homes, and here we are.

By Divemedic, ago

Housing Costs

Check this out, and I can prove that it is wrong:

  • A payment of $2665 corresponds to a house that costs $465,000, so that is realistic.
  • The 22% marginal rate isn’t applied to all of your income, it’s applied only to the portion of your taxable income that is over $81,050 for a married couple.
  • In order to qualify for this house, the payment can’t be more than 50% of pretax household income. To afford this house, a couple would need to make $5330 per month, which means they would have to make $64,000 per year combined.
  • Median household income in the US is $83,730. So an “average” couple would have no trouble affording an “average” house.

However, crying about how people making minimum wage can’t afford an average house ignores mathematical definitions. Average is more than minimum, and there is no way to change that.

This is leftists online trying to piss people off because most people don’t understand math well enough to know that this entire social media post is bullshit.

By Divemedic, ago

No More Credit

Trump is claiming that he will support a rule change for credit cards that will cap interest rates at 10%. This is a horrendous idea that will cause real problems. The reason interest rates are where they are is a topic I have visited here before. People with bad credit are very likely to default.

With a ten percent interest rate, if more than 3% or 4% of people default, the bank will lose money covering the defaults.

Studies have shown that the lower your FICO score, the higher are your chances of default.

Credit Score% of the populationprobability of default
800 or more13%1%
750-79927%1%
700-74918%4.4%
650-69915%8.9%
600-64912%15.8%
550-5998%22.5%
500-5495%28.4%
less than 5002%41%

Credit Scores and Default Rates

With a ten percent default rate, anyone who has a credit score less than 700 is a money loser and won’t be able to get anything other than a secured credit card, and those with a credit score between 700-749 are right there on the border and will likely see cards with very low limits.

That isn’t to say credit scores are without fault. I detest how the FICO score works, but it is what the banks use, and for that reason, Trump’s actions will make sure Americans stop living beyond their means.

Maybe that’s his intent. If it isn’t, well, price controls never work as intended.

By Divemedic, ago

Tips

I get so tired of hearing tipped workers on Social Media crying about how little they make. Watch this:

So in a 12 hour shift, he made $503. That works out to $42 an hour, plus add in the $11 an hour a server in Florida would make, and that comes to $53 an hour. Tips are crazy. It’s how a business gets away with not paying their employees and puts that responsibility on the customer.

We need to get rid of tips and just make servers hourly employees like everyone else. I haven’t seen a single rational argument as to why we still do this, other than servers loving how much they make by tricking people into thinking they are not making $$$.

By Divemedic, ago

Gold/Silver Ratio

There is something called the gold/silver ratio. For those who don’t know, that ratio is the price of one ounce of gold compared to one ounce of silver. That is, how many ounces of silver would be a trade for one once of gold at any given point in time.

A higher ratio means that either gold is overpriced, or that silver is underpriced. That can dictate which of the metals is the better deal. Historically, the ratio is usually between 60 and 80. In April of this year, the ratio was 100.8, meaning that one ounce of gold was worth about 100 ounces of silver.

Some investors are talking about the 80/50 rule. That is, if the ratio is higher than 80, stop buying gold and buy silver instead. If the ratio is less than 50, then silver is higher priced relative to gold, and it’s time to buy gold.

Thanks to the skyrocketing price of silver earlier in the week, the ratio is currently (as of this writing) 57. The gold/silver ratio was last below 50 in April 2011, when it reached a low of approximately 35:1. In April 1968, the ratio hit a century-long low of 16.75:1.

So why is this important to us? If you want to increase your holdings, you would sell some silver and use the cash to buy gold. Once the ratio returns to its historical mean, you would then reap a profit. Let’s say that the ratio hits 40. At that point, 40 ounces of silver (worth $1160 a year ago) could be sold and traded for a single ounce of gold. Once the ratio returns to its historical range, that would require that silver loses value or gold increases in value. Either way, your ounce of gold would be worth 60 to 80 ounces of silver, but you only paid for it with 40 ounces.

Just food for thought.

By Divemedic, ago

Trillion a Year

This article in Fortune correctly states that the $1 trillion in interest payments is problematic, but I think they understate the scope of the problem. The Federal government collects about $5 trillion a year in taxes. That’s a lot of money, but it isn’t enough. For decades, the government has spent an average of $1.45 for every dollar it collects in taxes.

The majority of it goes to so-called ‘mandatory spending’ and interest on the money that we have already borrowed. Mandatory spending includes entitlements like Medicare, Social Security, VA benefits, etc., which are REQUIRED by law to be paid. Interest on the debt must also be paid. Entitlement spending (Social Security, Medicare, Medicaid) accounts for about two-thirds of the federal budget, and interest on the debt that we already owe brings that to just over 83% of the budget. Entitlements are mandatory spending, meaning they’re on “autopilot,” growing automatically based on eligibility rules set by Congress, unlike discretionary spending.

All of the other spending: Welfare, Food Stamps, the Military, the Courts, jails, etc., account for the other $2.3 trillion of Federal outlays.

It’s just unsustainable, and anything that can’t go on forever, won’t.

By Divemedic, ago

Fed Activity

The Federal Reserve Bank cut the funds rate by another quarter point last week, and at the same time, it is buying about $350 billion in Treasuries. This should be causing interest yields on long term T-bills to drop.

But it isn’t.

This is, in my opinion, an ominous sign. When the Fed buys treasuries and cuts rates, it is putting more dollars into circulation, which should have the effect of having more dollars chase a (slightly) smaller number of Treasuries. This increases demand for treasuries while reducing supply, which should drive down rates, but it isn’t. This seems counterintuitive.

The Fed controls short-term rates.
Markets control long-term rates.
It appears that right now, markets don’t believe inflation, deficits, or Treasury supply are under control.

For years after 2008, the term premium was near zero or negative because:

  • Inflation was dormant
  • Deficits felt manageable
  • Global demand for “safe assets” was enormous
  • Central banks suppressed volatility

That era is over.

Now investors demand compensation for:

  • Persistent inflation risk
  • Fiscal dominance (monetary policy subordinated to debt financing)
  • Political dysfunction
  • Rising debt-to-GDP
  • Uncertain future Fed independence

This term premium alone is adding 100–150+ basis points to long yields, kind of like people with poor credit paying higher interest rates.

In a normal cycle:

Fed cuts monetary supply→ growth slows → inflation falls → long rates drop

Today:

Fed cuts monetary supply→ deficits widen → Treasury issuance rises → inflation risk persists → long rates stay high

This is called a supply-driven yield curve.

In this case, investors are looking 10, 20, and 30 years into the future, and the risks of holding IOUs from the Federal government are no longer near zero. They are somewhat higher, and therefore the risk of a potential deadbeat Federal government not being able to repay you, or repaying you in inflated, less valuable dollars is higher, and investors want to be compensated for this increased risk.

Markets see:

  • Structural labor shortages
  • Re-shoring and inflationary monetary policies
  • Aging demographics
  • Entitlement growth with no funding (Social Security)
  • Defense and geopolitical spending locked in

So the belief is that the Fed may cut rates now, but inflation or fiscal pressures will force higher rates later on down the road. This is becoming more and more possible the longer you peer into the future. That expectation keeps long rates high.

As more and more people come to realize that the national monetary issues are going to be a problem, the more that they will be apprehensive about the future. Perception is what drives faith in the dollar, and once we reach a critical tipping point, the dollar WILL collapse.

Spending = Taxes + Borrowing + Inflation (monetization)

For spending to constantly increase, as it has been doing, then the other three must increase. Since we know that spending CAN’T decrease because any politician that proposes meaningful cuts can measure his career with a cesium clock, the three supplies of cash (taxes, borrowing, and inflation) must continue to rise. The probability of a crash caused by a loss of financial credibility is low, but rising (10–20% over the next 20 years).

There are only two sustainable endgames:

A. Explicit choices

  • Raise taxes
  • Reform entitlements (drastic cuts to Social Security and Medicare)
  • Reduce spending growth
  • Painful, honest, stabilizing.

This isn’t likely to happen in today’s environment- the younger generation is screaming for MORE spending, not less. You think the dollar is taking a beating now? Wait until the government passes Medicare for all. Democrats spending more when they win in 2026 (which is looking more and more likely) and again in 2028 (also looking more and more likely) will result in vastly increased government spending.

B. Implicit choices

  • Debase and inflate the currency so you can pay yesterday’s debt with today’s less valuable dollar
  • Suppress rates by pressuring the Fed and QE
  • Let purchasing power erode

Politically easier. Economically stealthy. Socially corrosive, kicking the can down the road.

History suggests governments choose B until forced into A.

Bottom line

The future is not collapse, but it is painful. At least for the next decade. (The US economy is large and has a lot of inertia). Absent reform, the U.S. likely faces:

  • Higher average inflation
  • Lower real returns
  • More volatility
  • Less policy credibility
  • A gradual transfer from savers to debtors

The danger is not that everything breaks tomorrow. The danger is that everything slowly works worse, and by the time the costs are obvious, the choices are far harsher. The last item, above, means that you need to hold things that aren’t denominated in dollars. The goal is not to “beat the system,” but to avoid being silently taxed by it. Historically, people who do best focus on resilience, diversification, and optionality, not prediction.

Assets that tend to be hurt most in inflationary markets:

  • Long-duration bonds
  • Large cash balances
  • Fixed pensions not inflation-indexed
  • Assets dependent on stable real rates

Cash is liquidity insurance, not wealth storage.

  • Hold 3-6 months of expenses in cash or T-bills
  • Use short-duration instruments (T-bills, money markets)
  • Avoid long-term fixed-rate instruments unless yields are clearly compensating you.
  • High T-bill rates right now are actually helpful because they reduce cash drag temporarily. Just don’t take bills that are long term. In the longer term, you will be beaten by inflation.

Gold and other PMs are non productive assets. Because of this they historically:

  • Protect against monetary disorder
  • Do not reliably produce real growth
  • Best used as insurance, not an engine. Don’t hold more than 15% of your investments in PMs

Skills and income resilience beat portfolios

This is the part people underestimate. In every inflationary / fiscally stressed era, earners with scarce skills outperform savers and investors. If you can adjust income, negotiate pay, shift roles, or add consulting or side income, you are far more protected than someone relying solely on fixed returns.

The risk ahead isn’t sudden ruin for most people, it’s slow erosion of purchasing power and forced choices at bad times.

Individuals who:

  • stay liquid but invested,
  • avoid fixed claims,
  • own pricing power,
  • diversify quietly,
  • and keep their earning ability strong

tend to come through these periods intact and often ahead of those who tried to time the crisis.

Build skills, build wealth, build a stable base.

By Divemedic, ago

Reader Mail

A reader sent me this by email, rather than simply commenting on the post, and I usually throw those out. However, this one seemed a bit interesting to me, so here we go:

JFK had a top income tax rate of 90% and this was the period of highest growth in our economy.  Perhaps you need to check your assumptions.

Obviously, he knew what he was doing.  Back then, in figuring out your income, you could deduct things like starting factories and doing research on consumer products.  In short. doing things that benefited other people allowed the brainiac to pay less tax.  

Even though top marginal tax rates were 70%–91% in the 1950s–1970s, the actual effective tax rates paid by high-income individuals were dramatically lower. Almost nobody really paid 91% — or anything close to it.

In the 1950s and early 1960s:

The top marginal rate was 91%, but it applied only to taxable income above about $400,000 (over $4 million in today’s dollars), and “taxable income” was drastically reduced by:

  • Unlimited business expense deductions
  • Oil & gas depletion allowances
  • Real-estate depreciation
  • Investment tax preferences
  • Income shifting to corporations
  • Trust structures
  • Foundations
  • Tax-exempt municipal bonds
  • Deferral strategies

Thus, almost nobody actually reported enough taxable income for the 91% bracket to matter. Economists often say the 91% rate existed mostly on paper. Congressional and Treasury studies from the era showed that the average effective tax rate for high-income earners was typically 30–40%, but many wealthy individuals paid 15–25% after shelters while some paid near zero using aggressive loopholes (especially in real estate and oil).

President Kennedy even complained publicly that: “A millionaire may pay less taxes than his secretary.”

Sound familiar? This wasn’t a new phenomenon.

The 1986 Tax Reform Act (Reagan) slashed rates by 50% to 28% but eliminated many shelters — and ironically, many high-income individuals paid more tax after the reform, despite the lower rates. Because the tax code back then allowed:

  • Unlimited itemized deductions
  • Very generous depreciation schedules
  • Income averaging
  • Tax-free corporate perks (cars, housing, travel)
  • Tax-exempt investments
  • Turning salary into capital gains
  • Family foundations and trusts
  • Personal holding companies
  • Business losses used to offset income
  • The famous “oil depletion allowance”

In short, the rich could make most of their income disappear for tax purposes. This is why economists say the old system was “high rate / high avoidance,” whereas today’s system is more “lower rate / broader base.”

The other part of this was the minimum tax rate of 20%, which applied to everyone up to $2,000 per year ($20,000 per year in today’s dollar). Picture this- a person making $20,000 a year would owe $4,000 of it in taxes, and the poor didn’t have loopholes to exploit.

So don’t tell me how they were so good at taxing the rich back in the 60’s. It was JFK who advocated for a cut in tax rates and the elimination of many tax loopholes. The Revenue act of 1964 was passed after his death, and cut the top rate from 91% to 70%, but eliminated many tax loopholes. Still, there were many of them left, and most weren’t eliminated until Reagan lowered the tax rate even further while eliminating many tax write-offs. See the Laffer curve on how lowering taxes actually increases revenue.

By Divemedic, ago