The Interest Crunch Arrives

“Wars in old times were made to get slaves. The modern implement of imposing slavery is debt.”

-Ezra Pound

It's supposedly peak fall color week out there.

I have to say it hasn't been as spectacular as the locals had been predicting--lots of brown and yellow and, even now, green up there, without much of the fiery orange and red of years past. These things are hard to predict, particularly in the age of rather chaotic climate change.

So, back when we bought the Mighty Columbia in 2021, the dealer set us up with a twenty year note at 3%. The plane wasn't cheap, but the low rate made the whole thing pretty manageable. Each month we chipped away a little further at the principal.

Then on the fifth anniversary of the purchase, I noticed on the statement that the entire payment was being applied to interest, and had actually begun to increase. That 3% interest rate? Apparently it was only for five years, after which it floats at prime-plus-something. Our last statement showed an interest rate of 8%, and a payment that had increased by several hundred dollars a month with nothing being applied to principal.

We took the same sort of hit on the HELOC, which we'd used to buy this condo because I'd only been a month in my new practice at the time, and I knew no local bank was going to approve a conventional loan. The HELOC was always a floater, now at 7%. We'd paid over half of the purchase price back by this past summer, but it's still a big hit when the payment leaves our checking account every month.

P and I will be fine--we always manage a little cushion, which now is a bit thinner than I'd like. I think our priority for the next year, besides saving for that new engine for the Columbia, is going to be paying down or paying off the high interest debt.

But what about everyone else? How does a family making the mean household income in the U.S., about $87,000 before taxes, shoulder this burden with kids at home and a mortgage?

One casualty I can see on the horizon is the market for big-ticket items that relies on bank financing. Someone buying a house or a car figures out what they can afford based on the monthly payment, not the principal amount. A $500,000.00 house that once meant a $2,100.00 a month mortgage payment at 3% is now $3,700,00 a month at 8%. So you don't move to a bigger home when junior arrives, you turn down that promotion with a modest raise because you can't shoulder the cost of the home in the next city.

The same holds true for cars, for ambitious home improvement projects like a pool. The car thing is interesting because cars wear out, and sometimes you don't have a choice but to buy a replacement. Care to trade that Mercedes for a Kia, and end up making the same payment?

Our country is in the same pickle, thanks to negligent fiscal management that became simply reckless under the current regime. Our national debt has increased nearly eight-fold over the last thirty years, enabled by interest rates kept artificially low starting with the Bush II years. Then came the OBBB, which tanked tax revenues just as interest rates began their seemingly unstoppable march northward. The solution? Borrow more money to cover the rising interest service, which reflects the combination of the higher principal balance being serviced and the interest rate that is approaching double what it once cost the government to borrow.

I watched community banks play this game with real estate developers in my neighborhood in 2006 and 2007. It didn't end well, for the debtor or the banks.

So times are about to get really difficult, already are difficult for a huge swath of the country, of the world in fact. And our government at present is led by a grifter who's constitutionally incapable of acknowledging the true situation, much less doing anything about it. What's likely to happen, what always happens in the end, is a default on the debt. France has a leading presidential candidate advocating for exactly that. In our case, it won't mean a debt renunciation that anyone will notice. Rather, the Treasury will simply fire up the printer and generate enough dollars to buy back the debt, also denominated in dollars. Voila! Problem solved.

Except . . . everyone's dollars will suddenly be worth a lot less. And retirees and soon-to-be retirees (I'm looking in the mirror here) will see their savings tank. And that'll mark the end of global investors buying government bonds in dollars. We'll become Argentina.

Good thing P and I have this Plan B to go back to the farm and raise chickens and watermelons. As Hank Williams, Jr. put it forty years ago, "Country folks can survive." I just never thought I'd be one of those. Lucky to have options, I guess.