U.S. Debt – How Bad is it for Investors – is Debt a Problem for the U.S.? American Debt
Hi I’m Jimmy in this video. We’re going to look at the debt of the United States both debt held by individuals and debt held by the U.S. government. Ultimately our goal is to try to determine if we think that this enormous debt load of the United States. We’re going to try to determine how bad it really is for the economy. And do we think it’s going to cause an economic recession in the near future. Now this video is somewhat of a follow up video on a video I did called Should I invest now or wait for a crash. And in that video we walk through different leading economic indicators to try to determine what signs we were getting for the overall economy and what we thought might happen to the economy in the next twelve months or so. There’s a link in the description below. If you’re interested but basically the result of that was there are more negative signs than there are positive signs. Well many of the comments that I received in that video talked about the fact that I didn’t include the debt in the United States various forms of it. That’s what this video is intending to address. So let’s start with the overall government debt. And as we could see this chart goes all the way back to 2005 and you may notice that right about here. Well debt started to grow at a faster pace and clearly that was the result of the government jumping in after the during the Great Recession. Now obviously with government debt up above twenty two trillion dollars this is likely to be a bad thing for the economy but it’s not necessarily as bad as we might think. A lot of it depends on a few different things. So as an example if we were to have let’s say we had 500 of debt and let’s also imagine that we had a thousand dollars in the bank maybe that debt is manageable. But if we had 5000 dollars in debt that’s a lot worse. But if we also had ten thousand dollars in the bank maybe that much debt is in isn’t so much worse depending on how much income we have. Now this isn’t a perfect example but I think we get the concept that being said this is a chart of U.S. debt relative to GDP. Now that example wasn’t perfect because GDP isn’t the same thing as having money in the bank. But either way I think the point here is that it looks like things have gotten significantly worse. The debt to GDP is way higher than it has been as we could see this chart goes all the way back to 1966 and back then the government only owed about 40 percent of GDP. So this is still just government debt. We haven’t even touched personal debt yet. We’ll come to that in a second. This is that twenty two trillion dollars that we just saw compared to the GDP of the United States. That’s it. Which is last I saw just short of 20 trillion. Hence the reason that this is right over the 100 percent mark. OK. So this looks bad but this isn’t the whole story or at least not the only way to look at the data. Another way to look at it another way that I’ve seen it presented says something like you can’t really compare debt from 1981 to debt in 2019. Back in 1981 the 10 year Treasury bond had a yield of 15 percent while today that’s very same interest rate is barely more than 2 percent. And I think the argument is that well of course the government is going to borrow more debt when the cost of taking on additional debt is so much lower. And I get that logic somewhat I’ll explain more in a second but this chart here this chart is attempting to address this concept and we could see that what this chart does is it adjusts debt and GDP by the interest rate. So when we adjust U.S. debt according to the cost of that debt maybe it’s not so bad. So personally I’m not sure I agree with that concept all that much. And by the way I got all this data straight from the Federal Reserve on the St. Louis Federal Reserve Web site download all this data. That’s what these charts came from. And here’s why I don’t completely agree with looking at it like this. See to my way of thinking the twenty two trillion dollars in debt isn’t going to be paid off all that easily. So yes rates are low today but if rates start to go up well let’s say they go up to just five or six percent in let’s say five years. Well we would get a huge spike in this number since the debt isn’t going anywhere all that fast. And rates are likely to be a bit more fluid than that. OK. All that being said let’s try to shift over to personal debt to see if we can try to determine where the economy might be going in the near future. So this is a chart of total household debt as a percentage of GDP. And I was actually surprised to see that it has slid so much recently. Sure I expected the jump in 2008 but I thought that for some reason I thought that this would have leveled off by now. But I do want to point out that this number the most recent number that we have is actually the end of the first quarter. This is the quarterly number. So it’ll be interesting to see where we’re at the end of the second quarter right now. It’ll be interesting to see what the second quarter numbers end up looking like. Another way to look at this debt is with this chart. This is a chart of household debt as a percentage of personal income and as you could see this chart looks very similar to the last chart. So it seems that personal debt hasn’t turned higher just yet. Especially when we’re coming off such extreme highs like we had in 2007. So there are some other early warning signs that can help us predict where some of these numbers are heading. So this chart this is a chart of late payments on auto loans. So as we could see this number has been rising ever since 2014. So what this number is supposed to tell us is what percentage of auto loans are people defaulting on or which ones are more than 90 days late. So right now we’re just at a bit over four and a half percent. What about mortgages. Well this is what the mortgages chart looks like. And as we could see it seems that mortgages haven’t been hurt just yet. And if we logic this one out this actually makes some sense. See in my view I’m sure that if we were in a pinch we’re more likely to stop paying our car loan than we would stop paying our mortgage. But what about credit card debt. See it seems to me that we would stop paying credit cards right around the same time you might stop paying your car your car if you ended up in a pinch. This is what that chart looks like. And yes as we could see in this chart defaults have been on the rise for credit cards since 2016. Now this could end up being a very bad thing for the economy if it continues to go down this road. That being said this is another one that I’m sure we’ve all heard is a very big problem. This is a percentage of all the individuals that are at least 90 days late on their student loan payments. And this one has been climbing for a long time and it’s been stuck up over 10 percent for a while. To me 10 percent of people defaulting on student loans seems like a really really big problem. Now if we switch this chart over the total student loan debt what we can see that in the U.S. total student loan debt is more than one point four trillion dollars. Now the real issue here is that look at how quickly this is ramping up. This is getting very large very fast and it doesn’t even make sense to try to compare total student loan debt to something like GDP because the people who have attended college and let’s say the past 15 or so years. Well they’re the ones dealing with the majority of this problem. So in my mind yes this specifically is going to be a huge problem at some point if student loan debt continues to rise at this pace for let’s say the next 15 years. We’re going to have a very serious problem. This is already one point four trillion dollars in debt. To put that in perspective currently the GDP of Canada I believe is a big low bit over one point six trillion. This is one point four trillion. So at some point this is going to be a real problem. So for me the trickiest part of debt in the United States is that it’s not that easily corrected. How do we lower student loans as an example how do we lower student loan debt. Sure there are ways but are universities willing to lower their prices do less people go to college. What’s a good answer to the student loan problem as an example and government debt. Debt is just as big of a uncorrected problem. It’s unfair to say but a difficult to correct problem. So at the end of the day I believe that yes get in the United States is a big problem. It’s going to be a very big problem. Now there are some early warning signs with the credit card debt and auto loan defaults that perhaps that’s going to be at least part of the catalyst to maybe trigger the next recession. But it’s tough to tell for me as an investor. I see the debt being a problem but this debt’s been a problem for a long time and the stock market continues to rise. So it’s tough to tell what the government will do to react to it. What the government will do to help stimulate the economy but for me I think it makes a lot of sense to remain defensive with our portfolios now I don’t think it makes sense to not invest but personally I think that it makes more sense to be in the safer investment zone. But a lot of that depends on our risk tolerance. But what do you think. Do you think that it makes sense to stop investing now. One thing I think we should keep in mind here is that the government’s not going to want to deal with this problem any time soon. It’s possible they just kick the can down the road. They could keep rates as low as possible. Keep printing money and that could work for a while. How long. One year two years five years 10 20. I’m not sure at some point it’s going to be a problem. But when what do you think. Please let me know in the comments below and thank you for stick with me all the way into the video. I hope you found this informative. You haven’t done so yet. Please hit the subscribe button. Hit the thumbs up and I’ll see in the next video. Thanks.