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The Giant Borrowers


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What's going on?

US interest rates may be rising, but that hasn’t stopped Americans from borrowing – quite the opposite, in fact. Last quarter, the value of loans outstanding totaled more than $13 trillion – a new high.

What does this mean?

According to a report from the Federal Reserve Bank of New York, the total amount of US borrowing is now more than it was before the financial crisis (and the stock market is on a record “bull” run, too). Americans have been spending on credit cards (which retailers like Target and Walmart are probably happy about), car loans and mortgages. And, to go with those mortgages, the housing market has also risen – house prices went up like a brand new building.

Why should I care?

For you, personally: Less money, less (ahem, fewer) problems?

When interest rates rise, the cost of loans also rises – both new ones and existing loans that are “floating” (a.k.a. loans with interest rates that rise and fall with the rest, like some mortgages). Consumers with lots of debt – and especially those with floating mortgages (as mortgages are typically big, higher interest rates mean payments rise in dollar terms) might begin to feel the squeeze, which is exactly the point. Higher interest rates are supposed to discourage spending (because borrowing costs more) and encourage saving (because you get a better return on money in the bank). And less spending means less demand for goods, so the rate at which prices increase (a.k.a. inflation) slows and the economy cools. The idea is that growth is sustainable rather than a sprint off a cliff.

For markets: Higher rates may mean lower investment.

Rising interest rates increase borrowing costs for the US government and American companies, too. This may make them borrow less and, crucially, invest less – which also causes economic growth to slow. The US economy has been growing like a beanstalk, and the central bank’s likely to keep interest rates heading on the up and up.

Originally posted as part of the Finimize daily email.

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