The Debt Bomb?
Let's look at a string of charts from Scott Grannis of the Calafia Beach Pundit.
It’s important stuff to be aware of as the media continues to poach confidence in exchange for your attention:
- Recent releases covering estimates of households' balance sheet and financial burdens (as of June '19) confirm that net worth continues to rise at the same time that households' leverage continues to decline.
- Asset values are rising, but risk aversion remains strong, and that's quite healthy.
- What is perhaps most remarkable is that liabilities today have increased by only $1.5 trillion (10%) from their 2008 high!
- Massive income gains: Gen Y is just beginning to flush into the system for a 20+ year rising tide, and more jobs than people - and this data is set to continue its steady rise and improvement over time.
The Debt Bomb
Let me count the years we’ve been told economic Armageddon will be unleashed by a firestorm of debt.
And that messaging will never stop.
But maybe there’s a more productive way of looking at this.
Recessions most often come as a result of blow-off excesses. That’s when everyone feels good, everything looks great, everyone feels rich, no one feels afraid, no one sees risk, anywhere - and things seem like they grow to the sky.
The first problem with associating that thinking with where we are today is that we have exactly NONE of those elements in place, and we haven’t had them for years.
The second is that the very best thing that could have happened for a long-term investor was 2008-2009.
You heard me right.
That’s because the investor horizon impairment held in place by deep-seeded fear will take decades to erase.
And as to excesses, the only one that's obvious today is federal debt levels, which have risen to 78% of GDP as shown in the following chart from Calafia:
The last time bond yields were in this neighbourhood, the levels of debt to GDP were much higher as a percentage of GDP.
But you’ll never hear that in the press as the deception to drive fear is always in play.
It’s a commercial bonanza.
As any financial vehicle grows, its management/level of debt will change and expand and transform.
Companies experience it all the time.
And so do you.
By example, if you go buy a house costing three times more than your first house years ago - and carry a mortgage three times higher - does that mean you’re in peril?
Our economy is the same.
And the true burden of debt should also take into account the amount of interest being paid on outstanding debt relative to GDP.
Now, debt outstanding is quite high relative to GDP these days, but interest payments on that same debt are relatively low, thanks to historically low levels of interest rates.
Federal debt interest payments this year will total about 2% of GDP, well below the all-time highs of 3% reached in 1991, according to the Office of Management and Budget.
And sure, this can get worse, of course, if interest rates rise.
But rising interest rates would probably be accompanied by faster growth and/or higher inflation, which in turn would increase nominal GDP - the offsetting mitigation process for the burden of rising interest rates.
Note here though, faster nominal GDP growth would also likely boost tax revenues, expand jobs further and pay higher overall wages.
In essence, while federal debt looks bad on the surface, in reality we are far from facing a disastrous situation.
We’ve experienced many years in the past where the situation was indeed far more "risky."