Farmers and consumers keep racking up debt. When does it hit the wall?

There was an alarming story that Reuters had this week, which included reports from Wisconsin and mentioned that Wall Street banks have stopped loaning to farmers as the ag crisis continues.

Chapter 12 federal court filings, a type of bankruptcy protection largely for small farmers, increased from 361 filings in 2014 to 498 in 2018, according to federal court records.

“My phone is ringing constantly. It’s all farmers,” said Minneapolis-St. Paul area bankruptcy attorney Barbara May. “Their banks are calling in the loans and cutting them off.”…

Gordon Giese, a 66-year-old dairy and corn farmer in Mayville, Wisconsin, last year was forced to sell most of his cows, his farmhouse and about one-third of his land to clear his farm’s debt. Now, his wife works 16-hour shifts at a local nursing home to help pay bills.
Giese and two of his sons tried and failed to get a line of credit for the farm.

“If you have any signs of trouble, the banks don’t want to work with you,” said Giese, whose experience echoes dozens of other farmers interviewed by Reuters. “I don’t want to get out of farming, but we might be forced to.”

And the most recent information from the Federal Reserve on debt and other economic money flows backs this up. I used the Fed data to make this chart involving agriculture production loans, where farmers borrow money from banks to pay for their operations

See that leap in ”nonaccrual status” that started in 2016 and has kept on going up? Here’s what that means.

A nonaccrual loan happens after 90 days of nonpayment, and interest stops accumulating. The bank classifies the loan as substandard and reports the change to the credit reporting agencies, which lowers the borrower's credit score. The lender changes its allowance for the potential loan loss, sets aside a reserve to protect the bank's financial interests, and may take legal action against the borrower. The loan is put on a cash basis, meaning that interest is only recorded as earned when payment is collected, not as an assumed payment. Ordinarily, interest income is accrued on loans, since regular payment of both principal and interest is assumed.

According to the Federal Deposit Insurance Corp. (FDIC), an asset is to be reported as being in nonaccrual status if one of three criteria are met:

1. It is maintained on a cash basis because of deterioration in the financial condition of the borrower;
2. Payment in full of principal or interest is not expected, or;
3. Principal or interest has been in default for a period of 90 days or more unless the asset is both well secured and in the process of collection.

In addition, an increasing amount of home loans are being backed by farmland, increasing by 50% over the last 7 years.

Individual consumers are also racking up debt, as noted in this column by Brett Arends in CBS Marketwatch which warns of a “Debt Zombie Apocalypse.”

CreditCards.com just released a timely survey about the debt zombies. They’re carrying a balance on their credit cards from month to month, paying interest rates that average around 18%. Yet they carry on spending. They actually spend more on luxuries, on average, than people who can pay off their cards at the end of the month.

And many of them claimed they couldn’t possibly cut back sharply, according to the survey. Households in credit-card debt are spending an average of $1,600 a year on their cellphones, but only one in four said they’d be willing to cut that in half. They’re spending $1,900 a year on clothes, but only a third said they could cut that in half. The average household in debt is still spending more than $5,000 a year on their car.
This is not the first survey that shows how many people struggle to handle their finances, and it won’t be the last
.
And while it’s bad for them, it’s great for the economy. Everyone’s spending is someone else’s revenue. What would happen to the cellphone manufacturers and the network providers if everyone tried to live within their means?...

Meanwhile, the amount of credit-card debt that’s more than 30 days past due has jumped 9% in the past year. It’s up by a half since 2015. Good times.

You can argue that debt is a kind of soft socialism. The private-sector boom of the past 10 years has, infamously, favored the well-off and (especially) the very rich. But they can’t make their billions unless their companies can sell to everybody else.

If this is what balance sheets look like when the economy is doing well, imagine what they’ll look like when the next downturn hits. Oh, never mind. The Fed can keep cutting rates, and Uncle Sam can just print up a trillion more dollars.

As you can see, both uncollectable writeoffs and past due credit card accounts keeps on rising in recent years.

One of the few things keeping the economy afloat right now is decent consumer and government spending, as shown by the Atlanta Fed’s GDP Now estimate.

Estimated contributions to GDP Q2 2019, Atlanta Fed
Consumer spending +2.53%
Gov’t Spending +0.38%
Everything Else -1.50%

You can see where one bad run of unemployment, and/or one bite of austerity from the government side, and a lot of dominoes could fall fast. No wonder why the Fed thinks it has to keep pumping out money despite the allegedly strong topline numbers.

The comparisons to 2007 are building, and we had record highs in large-cap stocks back then, too. None of this feels real these days, and the sooner we get an adjustment to the fundamentals, the better. As the longer it takes for this Bubble to burst, the worse the damage will be.