Influential economist Mohamed El-Erian recently pointed out the stark contrast between US “economic exceptionalism” and the struggles of lower-income households in what he calls a “K economy.”
What Happened: On Monday, El-Erian posted a comment and shared a story from the front page of the Financial Times, highlighting the growing economic disparity in the United States. He noted that while the US economy is exceptional in many ways, it has also led to a “K economy” where lower-income households face significant and increasing challenges.
El-Erian’s post comes in the context of a recent report on the surge in US credit card defaults, which have reached their highest level since the 2008 financial crisis.
Why It Matters: This situation underscores the financial strain on lower-income households, which El-Erian refers to in his “K economy” comment. The term “K economy” refers to a situation where the wealthy continue to prosper while the less affluent struggle, creating a divide that resembles the letter ‘K.’ Traditionally the economy is viewed as ‘V’ shaped with even ups and downs.
Credit card lenders wrote off a staggering $46 billion in seriously delinquent loan balances during the first nine months of 2024. This figure, representing a 50% increase from the same period in 2023, is the highest in 14 years, according to data from BankRegData.
Mark Zandi, the head of Moody's Analytics, stated, "High-income households are fine, but the bottom third of US consumers are tapped out. Their savings rate right now is zero."
The rise in defaults underscores the strain on consumers’ personal finances following years of high inflation and the Federal Reserve’s policy of maintaining elevated borrowing costs. Early indicators suggest a growing number of defaults on consumer debt.
Capital One, the third-largest credit card lender in the US, reported its annualized credit card write-off rate hit 6.1% as of November, up from 5.2% a year ago.
Odysseas Papadimitriou, head of consumer credit research firm WalletHub, noted, "Consumer spending power has been diminished." Despite nearly $60 billion in consumer credit card debt being written off in the past year, another $37 billion remains overdue by at least one month.
Photo by International Monetary Fund on Flickr
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This story was generated using Benzinga Neuro and edited by Shivdeep Dhaliwal
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