As a nation and a society shouldn’t we be more concerned about the amount of debt we have individually and collectively? As a society taken as a whole we found ourselves foolishly wallowing in more and more debt whether it’s large corporations, government, or households. In college my economics instructor once asked the class “Who feels the burden of the government debt?” To him I answered by asking “What happens when the appeal to buy bonds dies out and the government can’t borrow?” His reply, “I don’t know, likely massive taxation.”
Total Credit Market Debt:
Total Credit Market Debt is defined as every measurable form of debt across government and private sectors. It has decreased since the high of 2008, but it is still astronomically high at 350% of GDP (Gross Domestic Product). This decrease can be attributed to the deleveraging, most notably in households, which took place in the private sector following the Financial Crisis of 2008.
The last time Total Credit Market Debt was in the low zone was 1981, which ironically was the first year of Ronald Reagan’s presidency. This also meant the introduction of “Reaganomics” which translated into borrowing money to provide for tax cutting primarily for rich earners. It crossed into the middle zone at that point and crossed again into the high zone just before 2005, again during a large period of tax cutting in the George W. Bush administration. It reached its all time high during the GFC (Great Financial Crisis) at 380% of GDP.
Household debt has decreased to more reasonable levels since 2008. Household deleveraging became necessary as housing values declined, and equity used for refinancing primary mortgage debt or taking on a second mortgage disappeared. Coupled with many households reaching the maximums on their credit cards and signature loans the paying down of this debt became mandatory. There has been a slight uptick since 2012, but generally speaking Household Debt has drifted back down into the Low Debt Service zone after about 20 years in the Middle Debt Service zone and as many as seven years in the High Debt Service zone.
Corporate debt has risen back to its highest peak in 2008. The ultra-low interest rate environment of most of the last 18 years is a major contributing factor for this. The proceeds of this debt typically went to such activities as stock buybacks, dividend payouts, or Merger and Acquisition activities as opposed to upgrading machinery, equipment, factories, computer systems, or other infrastructural needs. Although companies with excessive amounts of stock buybacks have shown good performance to their stockholders, buybacks can cause a detrimental effect on the company’s future. Buybacks reduce the overall corporate equity putting more of the corporate assets into the hands of debtors upon liquidation. This could make refinancing debt or acquiring new debt in the face of struggling times much more difficult if at all possible. Some companies listed on the NYSE have more money in repurchased stock than they have in total assets. Stockholders, including corporate managers are content without always bearing in mind that the buybacks are artificially propping up the value of the stock, and the company could face dire circumstances if this doesn’t get unwound eventually. As the Federal Reserve continues its tightening cycle we can expect that interest rates will continue to climb compounding this problem. In short, companies are borrowing money at super low interest rates to buy back their own stock to artificially pump up the stock price at the expense of gutting the company’s equity and crippling its ability to borrow in the future.
Government debt is close to its all time high. The IMF expects the trend to continue for the U.S. rising by nearly 10% over the next five years, but to reverse itself for all other major countries during that period. The government debt is an accumulation of deficits. Although Federal deficits were declining from 2009 to 2015 they’ve recently been burgeoning again. This can be attributed to more tax cuts and more Federal level spending. The Congressional Budget Office projects that the deficit’s deterioration will be massive over the next decade if Congress doesn’t act to turn the fiscal morass around. The only way for the government to eliminate a deficit is to run a surplus where more revenues are taken in over expenditures. The future might only be reconcilable if as a nation the deficits can be seriously reduced. This doesn’t set well with politicians who rather like doing the opposite. But if the deficits continue, the interest costs will swamp the Federal Budget taking away many pet projects from these same politicians and putting basic non-discretionary expenses at risk.
Total Credit Market debt is abnormally high and has fallen only slightly since the GFC. Deleveraging on the part of households has helped, but government and corporate debt continue to skyrocket bringing short term pleasure to a few individuals at the future expense of the country as a whole. We need politicians who are tough enough and willing enough to enact fiscal policy to greatly reduce debt and abandon the idea that cutting taxes for the rich always pays for itself by providing a bigger economy. So, as we borrow and borrow and borrow remember: the burden of the debt rests with future generations and will someday include massive taxation if it can’t be dealt with otherwise.
Sources: https://bit.ly/2lMZsPf Liz Ann Sonders, Charles Schwab, Debt Growth, (includes graphs for added explanation).