What happens when the bills come in faster than they can be paid? Millions of Americans are trying to figure out an answer to this question, but so far no one has. In the interim the problem has only been getting worse.
Until a few years ago, people were able to get away with living beyond their means because interest rates were historically low. Certainly, the payments on their mortgages and auto and other loans were very high. Nevertheless, they were generally manageable and the good times kept rolling. This all changed when the Fed began raising rates, and la-la-land gave way to reality. And now we’re waking up, drowning in a sea of debt, and wishing there were an easy way out of this dilemma.
The amount of debt is shocking. Here’s how The Economic Collapse Blog summed up the situation: “Credit card debt is at an all-time high, auto loan debt is at an all-time high, mortgage debt is at an all-time high, corporate debt is at an all-time high, state and local governments all over the nation (have) absurd amounts of debt, and the federal government has piled up the single largest mountain of debt in the history of the world. Our whole society is absolutely drowning in debt at this stage.” And nobody knows what to do.
Meanwhile, debt keeps increasing. “As Americans are depleting their savings accounts and tacking on more and more debt, they are quickly finding out that it still is not enough to make ends meet,” says CPA Lena Petrova.
Pointing Fingers
It’s human nature for people to look for a scapegoat when they make a mistake. And sometimes that’s warranted. But one prominent magazine has a different take on this.
“Inflation is your fault,” according to The Atlantic, a respected publication that covers politics, foreign policy, business, the arts, and more. “If people are so mad about high prices, why do they keep buying so many expensive things?” In other words, The Atlantic says you are the problem. You are causing inflation by buying expensive things.
The latest official inflation data released by the Fed shows that as household debt is edging higher Americans are depleting their savings and maxing out their credit cards.
What options do they have left? The only one is to keep dipping into their 401(k) retirement accounts, which is precisely what they are doing in record numbers. In fact, recent reports by both Fidelity and Bank of America show that 401(k) balances are declining while retirement hardship withdrawals are rising.
According to Fidelity, at the end of the third quarter 2023 the average 401(k) balance had declined 4%, while loans and withdrawals increased. Fidelity compiled these quarterly data based on the savings and account balances of more than 45 million accounts held with them.
“This is a clear sign that many people are in a desperate situation as such withdrawals are made only when there are very few or no other options,” says Petrova.
Paycheck To Paycheck
8 in 10 Americans say high inflation and the cost of living are causing stress. And 57% are unable to afford even a $1,000 emergency expense. “If a $1,000 emergency expense is a serious issue with so many people, it is safe to say that 57% of U.S. households or more are living paycheck to paycheck. “Having a savings account is now largely perceived as a luxury instead of a norm.”
The Fed certainly must feel gratified by the latest inflation numbers, which show that the rapid increases that we’ve seen are slowing, but the problem is far from over because Americans are still reeling from their effects.
Fidelity says the number of workers who made hardship withdrawals in the third quarter of 2023 increased to 2.3% from 1.8% in the comparable period last year.
And a report from Bank of America came to a similar conclusion. It found that the number of 401(k) plan participants in the third quarter of 2023 who made hardship withdrawals increased 13% from the second quarter of this year; and they were up a whopping 27% from the first quarter of this year.
Petrova believes these are signs that pandemic savings are now gone and that unexpected crises are causing severe distress.
“All of these paint a grim picture,” she says. “You have to wonder: ‘What is the Fed’s long term plan here? Do they even have one?’”
Just several weeks ago, Fed Chair Jerome Powell said that while the official rate of inflation is trending lower, it is still too early to speculate about rate cuts. However, since then, Powell has made even tougher remarks. He said the Fed is not thinking about lowering rates. In fact, in prepared remarks Powell said “We are prepared to tighten policy further if it becomes appropriate to do so.”
The Economic Collapse Blog points out one of the unfortunate aspects about being financially pressured is that in the long run, people who take on more debt to pay their bills end up paying higher prices for the items they purchase.
For example, the average American has over $5,000 in debt. If that individual makes the minimum payment each month, based on current interest rates, it would take him or her approximately 279 months to pay off that debt. And he or she would, at the same time, be paying a whopping $8,124 in interest.
Unfortunately, rather than getting a break, poor and working poor people often end up having to pay more than the well-to-do. Sad but true.
Sources: bloomberg.com; economiccollapseblog.com; theatlantic.com; yahoofinance.com; YouTube: Lena Petrova: Desperate Times: 13% Surge in 401(k) Emergency Withdrawals.
Gerald Harris is a financial and feature writer. Gerald can be reached at This email address is being protected from spambots. You need JavaScript enabled to view it.
