The volume of personal loans in Michigan is growing at an abnormal pace, increasing by 16.7% year on year. The main impetus comes from auto loans, which slowed sharply to 4.7% at the end of September 2022 after rising 10% at the beginning of the year. Other loans (personal loans, payday loans, cash advance loans, etc.) are accelerating to 13.2% (the fastest pace since 2007).
The total amount of cash loans taken by Michigan residents through the banking system is growing at 12.2% per year, which is the highest annual growth rate in the last 15 years. This does not include mortgage lending.
The sudden cancellation of state budget support programs and the subsequent drop in incomes led to the fact that the savings of the population fell to a historic low.
The cost of current consumption has led Americans to actively borrow. This is explained by the fact that they consume already limited credit resources. In addition, low interest rates stimulated the demand for cash loans. Therefore, consumption outstrips production. Fortunately, there are places like first-federal.com where you can get a loan today with any credit and get the funds you need in a convenient direct deposit into your bank account.
Now let’s move on to the question of how it all ends. The law of physics states that an object in motion will remain in motion unless another force acts on it. Given the current trajectory, it’s safe to say that Michigan consumers will continue to borrow and spend until they can no longer do so.
The trend of Michigan consumers buying more and more is dangerous, as it could lead to a collapse in productivity and real incomes. Who will pay for this consumer frenzy if people can’t pay themselves?
Lending in Michigan
In Michigan, there has been a revival in lending through banks, which is not a typical post-2008 “new normal” trend. Then it became a problem, so what is the reason?
Negative real interest rates caused a blockage of the open market and a failure to attract investors. This led to the collapse of the debt markets in January 2022, and this trend accelerated until August.
The market for new bond issues was very limited, and there were difficulties in refinancing existing debt.
In January 2022, corporate lending in the state began to skyrocket. In just seven months, the volume of outstanding loans increased by 10% of the total portfolio. This is a very high rate compared to similar periods in Michigan history such as 2007-2008 or 2020.
Interest rates on US business loans vary by company size, industry, and availability of collateral. However, most rates are currently below inflation, so this is a good time for businesses to borrow cash. The market does not provide loans from external sources, so businesses have to rely on bank loans. It was forgotten during the financial crisis in 2008 until 2021, but now it is becoming common again.
As bank lending grows, so do the risks associated with the banking system. The main demand for loans comes from enterprises that have debt to bad debtors – this helps to maintain the stability of the entire structure, as it cuts off these enterprises from further borrowing.
The banking system will face an increase in delinquencies, write-offs and even interest gaps due to the fact that risks will be shifted from investors to banks. This will reduce banks’ margins and lead to a future banking crisis.
Also in June in Michigan, supporters launched an initiative to cap the interest rate on payday loans, which currently can go up to more than 370% per annum.
It will be possible to vote for this initiative in November 2022. If the proposal is not passed by the state legislature this summer, voters will be asked to approve a state law by voting in November that would limit interest rates on payday loans to no more than 36% per annum.
If passed, Michigan will join 18 states plus the District of Columbia that have capped payday loan rates at or below 36% per annum. And this will also have a positive effect, since most payday loans turn out to be unbearable for the population at such a high interest rate
The collapse in real disposable income of Michigan households is due to high inflation, slowing wage growth and a halt in fiscal doping.
In the second quarter of 2022, real disposable income decreased by 4.2% compared to the same period in 2021. In the first half of 2022, there was an 8.3% decline in disposable income compared to the first six months of 2021. This was likely due to the “helicopter money” that was introduced in March and April 2021.
The net government subsidy as a percentage of household income shows how much the government takes from the population compared to how much it gives back. Currently, the net government subsidy is about minus 4% of revenue, which is a tighter fiscal policy than in 2013-2019.
The histogram of net government subsidies shows how crazy the state policy was in 2020-2021 when net government subsidies not only went into plus but also reached 9-10% of income, that is, more than 12-15% of income was subsidized by the state compared to the period 2013-2019. During this period, the government provided significantly more subsidies than in previous years, which is a concern given that these funds could be better used elsewhere.
Fiscal valves are closing, tightening policy, but now it is softer than in 2004-2007. This is due to the fact that then net government subsidies were minus 5-6% compared to the current rate of minus 8-9%.
To maintain the previous level of consumption, the Michigan population will have to reduce the savings rate to 5%. This is a 15-year low and 2 percentage points below the 2013-2019 average. The hype surrounding COVID has driven the 2020-2021 average to over 16-17%.
Trends show that fiscal policy tightened significantly between 2013 and 2019, with the savings rate falling by an average of 2 percentage points. This is done in order to compensate for falling incomes and tight fiscal policy.