Editor's note: Before long, we'll likely see a new wave of oil and gas bankruptcies...

But that will be just the beginning of the calamity.

Today's Masters Series essay is adapted from the March 11, 2019 edition of the Digest. In it, Stansberry's Big Trade editor Bill McGilton details a serious problem for many Americans today... and explains why it's only a matter of time before this whole situation blows up...

A Disturbing Look at the American Consumer

By Bill McGilton, editor, Stansberry's Big Trade

Most people would call Tom and Kate "rich"...

But as I will explain today, the married couple of 20 years is just a step away from financial disaster.

Tom and Kate are in the top 15% of U.S. households, bringing home a combined $160,000 per year. Yet like many people, they're deeply in debt... spending everything they make and borrowing even more.

They're in their 40s and live in a Northeast suburb with their three kids. They both hold graduate degrees and work in the insurance industry.

But Tom and Kate owe so much money, they don't even know the exact total – and they're afraid to figure it out.

They know it's at least $600,000. That includes two mortgages on their house, totaling $360,000 (and zero equity in the house)... $60,000 in credit-card bills spread over 10 to 11 cards (eight of which are maxed out)... $18,000 in a private loan... and around $140,000 in student loans (which they're not paying because they've declared hardship status).

Plus, they borrow an additional $15,000 each year to send their kids to private schools... And they lease a car.

Tom and Kate know they have a serious debt problem...

They spend their lives in a constant state of stress – trying to figure out ways to juggle the debt. They consistently live beyond their means. The only thing that limits their spending is the limit on their credit cards.

They live in a big house, send their kids to private schools, buy organic foods, eat sushi regularly, drink gourmet smoothies, and wear nice clothes – even though they can't afford any of it.

They even bought their son an expensive, new suit at Nordstrom for his high school prom because while they didn't have the cash to rent him a tux, they did still have credit available on their Nordstrom card.

Despite being hopelessly buried in debt, certain banks are still willing to extend them even more credit.

Even Kate admits these banks would "have to be slightly crazy to approach us with a loan." But when they apply for one, the banks always seem to say yes. "It's ridiculous," Kate says.

Like so many other Americans, Tom and Kate are stuck in a debt trap...

Tom once cashed out his $70,000 401(k) to pay off three credit cards and a loan. Kate borrowed $40,000 from her parents to pay down her credit-card debt. Her parents thought they solved Kate's financial problems... But little do they know, the couple burned through that money long ago and maxed out their credit cards yet again.

The couple is so ashamed of their situation that they used pseudonyms when they told their story to financial-planning website Wealthsimple in late 2018.

Kate is pushing Tom to declare bankruptcy, but he worries that will hurt his future job prospects.

The family is just one job loss, personal crisis, or economic downturn away from no longer being able to juggle their debt. And then the house of cards they built will come crumbling down. It's only a matter of time.

But Tom and Kate aren't alone...

Millions of overleveraged consumers – who can't distinguish between a "want" and a "need," refuse to live within their means, require a certain standard of living, and use most of their available credit without knowing when or how they'll pay it off – are a big credit risk. They live on the edge of default. Credit agencies refer to these folks as "subprime."

Certain banks specialize in providing revolving lines of credit to subprime borrowers. They charge these risky borrowers much higher interest rates than prime borrowers. The business is incredibly lucrative so long as the interest rates are high enough that they can generate more money than they inevitably lose in defaults.

In recent years, a strong economy, low unemployment, and low interest rates meant it was easier for people like Tom and Kate to juggle all the debt. So it was a perfect environment for subprime lenders – which thrive off low default rates and a stream of high-interest payments coming in the doors.

Of course, we all know this irresponsible lending can't continue forever...

Inevitably, irresponsible lending always leads to a bust. That's when the Toms and Kates of the world can no longer hang on, defaulting in droves and crashing the stocks of the banks who lent them money.

The next subprime bust is coming... It's a matter of when, not if.

Nearly four in five Americans right now are like Tom and Kate – borrowing like crazy today and sowing their financial downfall tomorrow. You can see in the following graphic that total household debt continues to climb, increasing steadily since the middle of 2013...

Total household debt reached a new all-time high of $14.2 trillion at the end of 2019... During the last financial crisis, total household debt peaked at $12.7 trillion. In the past year alone, total household debt increased by $600 billion, according to the Federal Reserve Bank of New York.

Mortgage debt is up to $9.6 trillion... surpassing the peak reached during the last financial crisis by more than $300 billion. From the beginning of 2008 through the end of 2019, auto-loan debt had risen 60% – from $810 billion to $1.3 trillion. And student-loan debt increased about 160% – from $580 billion to $1.5 trillion.

Meanwhile, credit-card debt is now back at an all-time high of $930 billion, up nearly 20% over the previous three years. Credit-card debt is growing so fast, it's even outpacing strong wage growth – which, according to the Atlanta Fed, was around 10-year highs at 3.8% in January.

Despite a strong economy with historically low unemployment rates, many people still struggle...

And they're turning to credit cards to fund the difference.

Part of the problem is the disconnect between wage growth and purchasing power, as measured by the Consumer Price Index ("CPI") in the chart below...

Average wages are now around $24 an hour. But in real terms, $24 an hour has the same purchasing power as approximately $6 an hour had 40 years ago. In other words, purchasing power for the average wage earner has not budged in the past 40 years.

Keep in mind that most of the wage increases apply to the top earners. Labor value on the lower end of the spectrum isn't keeping pace with inflation. Many people are getting poorer and are finding it hard to adjust to a lower standard of living.

Like Tom and Kate, millions of Americans are turning to credit cards to fund the gap between income and expenses. These people have no hope of paying off their debts. Many can only afford to make the minimum payments each month.

Nearly half of credit-card account holders maintain a balance every month. They use the cards as debt "revolvers," paying mostly interest each month. Only 30% of credit-card borrowers pay off their debt in full each month.

Using a credit card this way is incredibly expensive. The interest rate on the debt tends to be extremely high – around 17% a year, according to online marketplace CreditCards.com. For subprime borrowers, the average is 25%.

If you're getting charged 17% a year and you're only paying the minimum monthly payment, your balance doubles about every four years. At 25%, the debt doubles about every three years, quickly turning small balances into large ones. And as interest rates rise, it becomes even more difficult to make even the minimum payments.

This disturbing trend can only go on for so long.

Eventually, millions of Americans will fall so far behind that they'll just stop paying altogether...

One of the first things people stop paying is unsecured credit cards. There's no immediate consequence, because there's usually nothing of value for a creditor to take.

So far in this credit cycle, nothing has snapped... yet. But the financial strain continues to grow.

Credit-card delinquencies over 30 days increased from 5.1% in the second quarter of 2016 to 7% at the end of the fourth quarter of 2019. Altogether, $65 billion of credit-card debt is now delinquent over 30 days. And 5% of all credit-card debt is more seriously delinquent – with no payment in more than 90 days.

And the trouble isn't limited to just credit cards...

Almost 5% of the total $1.3 trillion in auto loans outstanding ($65 billion worth) has gone unpaid for 90 days or more – a new record. Trouble is brewing when folks stop making car payments. That's typically one of the last things people stop paying, since they need a car to go to work.

Delinquency on student loans is also at all-time highs. Officially, $167 billion in student loan debt was delinquent as of the end of 2019. But the actual number is far higher. Borrowers can avoid repaying their loans – using forbearance and deferment, for example.

Even the New York Fed acknowledges the effective delinquency rate is far higher than what's reported. It estimates that the real delinquency on student debt is at least double, at $333 billion – or 23% of the total student-loan debt. And it's likely far higher than even that, as more than 40% of people who borrowed from government student-loan programs are behind on their payments or have stopped making payments altogether.

One study from the Fed found that 40% of adults couldn't come up with $400 for an unexpected expense without selling something or borrowing the money. And just one-third of adults like Tom and Kate either can't pay their bills or are just a minor setback away from being unable to pay.

This combination of rising debt and rising delinquencies can't go on forever...

And as regular Digest readers know, this situation is paralleled by even greater extremes in the corporate debt market.

Trouble is brewing... It's only a matter of time before this recklessness blows up. And when it does, it could trigger dramatic consequences for both the markets and the economy.

We're likely to see a severe bear market and one of the biggest credit-default cycles on record...

That's why we launched Stansberry's Big Trade a few years ago. We want to help our subscribers keep tabs on the U.S. corporations that are most likely to default and whose large remaining equity valuations provide a low-cost speculation.

And our unique strategy provides portfolio "insurance" as the turbulence sets in...

Over the past few weeks, we've seen how quickly the markets can turn. The 11-year-long bull market is over. And as a result, it's as important as ever to make sure you're insured.

Regards,

Bill McGilton

Editor's note: It's already getting ugly out there... In just three weeks, stocks plunged from all-time highs into bear market territory. If you're like most folks, you're probably worried.

During a free emergency briefing this Thursday night, March 19, at 8 p.m. Eastern time, Bill will discuss where we believe the market is going next. He'll show you how to potentially make a fortune with just a few small bets. And he'll even give away the names of three stocks to target immediately with this investment strategy.

So if you're interested in trading today's unpredictable market or want to learn about ways to protect yourself from a down market, we urge you to tune in. Save your spot right here.