The Great Reset
18/05/16 19:26
The Potential of a Great Reset
In finance, when they reset, what they mean is that the payment, or income stream depending on if you are the lender or borrower, changes based upon some pre-agreed upon conditions. A common condition is when the interest rate resets after a specified time period and predetermined reference (or in industry parlance, and index rate such as 6 month LIBOR).
Well, interest rates have been at 0%, or pretty close to it, for a long period of time. Expectations are they are going to go up. What happens to all those interest payments and household budgets? Even if rates are fixed, they are only fixed as long as the term. So when it comes time to get a new car, either through loan or lease, your rate to borrow for transportation will go up.
If income growth covers the cost of rising interest rates, then this shouldn’t be a problem. However, if it does not, and we certainly have had very little income growth over the past decade, then it will be a financial drag on household budgets. While total debt to household income ratio has come down from the peak in 2008, it is still near historical highs. Meaning there is a lot of debt our there. And some of it is going to be resetting. And your raise might not cover it.
In finance, when they reset, what they mean is that the payment, or income stream depending on if you are the lender or borrower, changes based upon some pre-agreed upon conditions. A common condition is when the interest rate resets after a specified time period and predetermined reference (or in industry parlance, and index rate such as 6 month LIBOR).
Well, interest rates have been at 0%, or pretty close to it, for a long period of time. Expectations are they are going to go up. What happens to all those interest payments and household budgets? Even if rates are fixed, they are only fixed as long as the term. So when it comes time to get a new car, either through loan or lease, your rate to borrow for transportation will go up.
If income growth covers the cost of rising interest rates, then this shouldn’t be a problem. However, if it does not, and we certainly have had very little income growth over the past decade, then it will be a financial drag on household budgets. While total debt to household income ratio has come down from the peak in 2008, it is still near historical highs. Meaning there is a lot of debt our there. And some of it is going to be resetting. And your raise might not cover it.
