Posted on 02/20/2017 2:20:16 PM PST by Lorianne
America has a debt problem.
That shouldn’t come as a surprise. For as long as I can remember, we’ve had a debt problem.
Americans have been endlessly told that debt is good. It builds good credit, and a little debt spending can help light a fire under the economy.
According to the U.S. Debt Clock, the U.S. national debt has soared to $19.98 trillion, and it’s still climbing at a frightening pace.
Approximately $20 trillion is more than a little debt spending, and the current administration is ready to whip out the White House credit card and spend at a blinding pace as we invest in our infrastructure, a border wall with Mexico and a massive expansion of the Navy, while also planning to slash taxes.
But despite the federal government’s love of debt spending, its bad habits aren’t what could bring the economy to a sharp and painful halt yet again…
A Different Debt Problem
American household debt has skyrocketed, climbing to $12.58 trillion by the close of 2016, according to the Federal Reserve Bank of New York. It is now just $99 billion shy of the peak reached in the third quarter of 2008 — just as the financial market started to crash, leading to the Great Recession.
Household debt climbed by 1.8% from the third quarter of 2016 to the fourth quarter and is up 12.8% from the low reached in the second quarter of 2013.
In fact, Americans managed to shed $1.5 trillion in debt from 2008 through 2013 through foreclosures and the slow process of just paying down debt. But in less than three years, we’re right back to where we were.
The Household Debt MeltdownThe key difference between the 2008 peak in household debt and the household debt that we are facing today is the composition of that debt. Overall, mortgage debt is down from its peak, and there has been a sharp spike in nonhousing debt such as student loans, credit card debt and auto loans.
The New Subprime
Digging deeper into the data released by the Federal Reserve Bank of New York regarding the type of debt that American households have racked up, we find that student loan debt topped $1 trillion for the first time ever in 2013 and is now sitting at $1.31 trillion.
The Household Debt MeltdownIn addition, auto debt breached $1 trillion for the first time in 2015 and now sits at $1.16 trillion.
One mounting concern we’re seeing is that while subprime borrowers have largely been forced out of the housing sector due to banks’ new strict lending policies, car lending is still very loose.
As a result, we’ve seen a substantial spike in subprime auto loans. To make matters worse, newly delinquent car loans tapped an eight-year peak. The Federal Reserve Bank of New York reported: “Car loans delinquent by 30 days or more grew to $23.27 billion, the most since $23.46 billion in the third quarter of 2008.”
And yes, we can play that game where we argue that subprime auto loans aren’t going to cause the same crash we saw when the housing market fell apart because we’re not looking at the same type of derivatives insanity that we saw in 2008. (But don’t worry, banks are brewing up new problems with derivatives chaos. I’ll just leave that to Jeff Opdyke to explain.)
Squeezing the Consumer
Too many talking heads are eager to breathe a sigh of relief that Americans’ latest debt problem isn’t centered around their mortgages — or at the very least, subprime mortgages.
But they’re too quick to brush off the fact that Americans have tallied up nearly $12.6 trillion in debt. That’s no small potatoes. Debt that size is crippling.
Now add in the fact that we have a Federal Reserve that is determined to lift interest rates this year at least twice … and possibly more. That means Americans are going to be paying out more in interest payments on so much of that debt, while wage growth remains slow.
We’re facing a situation where Americans are going to be spending more of their money paying off that $12.6 trillion in debt or risking falling behind. And if the American consumer is spending more on debt, then he’s spending less on things like eating out, a new TV, vacations and all the great things that power the economy and make the American consumer the major supporting force behind the growth of the GDP — currently U.S. consumer spending accounts for 70% of the economy.
Now you can see the precipice we’re balanced on.
If the money coming into the household doesn’t increase to counter rising debt repayment demands, then spending is going to shrink … and so will the U.S. economy.
Bet on it.
Yep. Household wealth has risen considerably because of the stock market and maybe with Trump in office, it won’t burst.
The average P/E ratio is not at an astounding number at all and no reason for a crash to happen if Trump succeeds.
I know it won't work but because we've been screwed for so long it is an appealing idea.
Now the debt, homelessness and crime will return as major issues.
All depends on who is in charge.
Fake News lives.
$20 trillion in debt Obama&Co finest work.
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No mention here that the national debt nearly doubled under Obama. Talk about a "blinding pace". More biased reporting.
Now the debt, homelessness and crime will return as major issues.
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You are exactly right. Homelessness was the big meme in the media when Bush the Elder was president. But the instant Bill Clinton came into office, homelessness disappeared from the headlines.
Now the national debt will suddenly become a threatening problem that will get lots of print and media attention.
Our government has been happily subsidizing corrupt and profligate foreign governments for a long time running.
Our so-called law makers continue to screw the voters. Thankfully, the Trump administration has a different mindset.
I’d love to hear Dave Ramsey’s take on this
Debt is a tool.
Used properly, it builds wealth.
Used improperly, it destroys wealth.
This so important it should be core curriculum in schools.
Pffht.
The average American has no real knowledge of economics, finance or debt. And they are all but functionally illiterate when it comes to math.
Look at what happens to many of our high paid pro athletes, or those instant millionaires thanks to the lottery.
My first job out of college was selling loans, mostly car loans. To say it was eye opening is a huge understatement. At the time the 18 month new car loan was the standard, 2 year for those with top credit ratings. The length of loans today is insane.
I never saw a single customer actually read “the fine print” on any loan. I have never not read all of it on anything I signed.
*The sky is falling, the sky is falling”
$20T? Where’s the gorilla in the room? $120T+ in unfunded liabilities??
Not a single Congress in ages interested in slowing down at the buffet, let alone hitting the gym and tightening its belt.
We’re so far removed from a Constitutional Republic, it’s things like this that I am thankful I can’t have children.
Not a PEEP from the ‘leadership’ in D.C. No ‘opposition’, no ‘big ideas’; but they’ll be glad to whittle around the edges and put their hands out for the NEXT election where they *REAL* work will get done....”I promise. Trust me.”
Don’t worry, I’m sure the nature boy, Mr. Budget, will have another 25+ yr., dreamy plan to float to the gullible masses (but don’t you dare gore *MY* ox IE: touch *my* illegal SS/MediXYZ).
So in 2016 we imported $2.3 Trillion. If you slap a 40% tarriff on that, you get $920 billion in tariff revenues a year. That will pay the interest plus a decent principle payment on the national debt.
At the same time, that will start to shift the jobs back from overseas. Which means more people working. As people go back to work, it means fewer import tariffs but even larger income tax revenues.
Now people are earning money to spend into the US economy. We are making more products so there are more corporate tax revenues. We have more people earning money, paying income tax, Medicare tax, SS tax.
And now you are having to pay as much to support the unemployed. State and local communities are getting more revenues too, from sales tax, property tax, and income tax.
Property values soar, stock markets soar, incomes soar, household debt is reduced. National debt is coming down. interest rates lower as government demand for debt drops.
Now people are paying less interest again.
That’s how you get out of this.
That’s what was wrong with Ryan’s budget. He had no vision. He didn’t address the economy at all. He just wanted to cut medicare, medicaid and social security to put a bandaid on it while our jobs were still fleeing the country.
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