Dangerous debt levels

by Zain Jaffer

Recently in early 2024 Fed Chairman Jerome Powell said that the US is on “an unsustainable fiscal path.” He said that we are “borrowing from future generations.” Powell suggested that we need a serious adult talk about the way America spends money by creating debt over and above what it collects as revenue and the size of the American Gross Domestic Product. Jaime Dimon of JP Morgan said the same thing a few days earlier.

As for price inflation, Powell said that,inflation has come down really over the past year, and fairly sharply over the past six months. We’re making good progress. The job is not done and we’re very much committed to making sure that we fully restore price stability for the benefit of the public.” That sounds like Fed-speak for rate hikes are still possible in the next few months, or at least no cuts yet.

He said, “Well, we have a strong economy. Growth is going on at a solid pace. The labor market is strong: 3.7% unemployment. And inflation is coming down. With the economy strong like that, we feel like we can approach the question of when to begin to reduce interest rates carefully.”

Going back to debt, it is really a matter of common sense. No household would run for long if it spent beyond what it earned. No company would be in business for long if it did the same. For individuals with credit cards, they would cut it in half. But apparently not the US government. 

Consider now that the U.S. has a record high $17.5 trillion in household debt. $12.3 trillion in mortgages. $1.6 trillion in auto loans. $1.1 trillion in credit card debt. All of these at record highs. Add to that an almost record high $1.6 trillion in student loans [https://fred.stlouisfed.org/]. 

The total home mortgage debt is more than double the 2006 peak and total credit card debt is officially up half of what it was in 2020. People don’t want to buy homes because rates are high, and people don’t want to sell because they know if they sell and buy a new home they will sign up for those same high rates. So the housing market is mostly frozen with a few exceptions of those who really need to move, have family or life changes, or have found their dream home and do not want to lose it.

Delinquencies on credit cards and auto loans have hit record highs since the 2008 financial crisis. Companies are also having a hard time as many of them will need to renegotiate their mature loans to the higher current interest rates. Because their revenues are so low after COVID and exacerbated by current conditions, many of them will likely default. Already they are struggling just to make payments on the older, lower interest debt.

Unfortunately consumers are trying to cope with inflation using debt, charging items left and right and making things worse.

We are starting to dig our own hole. Powell is already signaling this.

SOURCES:

https://www.cbsnews.com/news/full-transcript-fed-chair-jerome-powell-60-minutes-interview-economy/

https://fred.stlouisfed.org/