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.

57 comments on “U.S. Debt – How Bad is it for Investors – is Debt a Problem for the U.S.? American Debt”

  1. Learn to Invest says:

    What do you think of the debt of the United States? Is the debt going to be what triggers the next recession?

  2. Stock Market Investing says:

    America’s massive debt is a problem for every taxpayer all debt has to be repaid that’s why these record low corporate tax cuts are unsustainable!

  3. Fernando López says:

    As always, very well explained. Would it be possible to make any future videos related with growth investors? How to analyze companies, indicators, strategies… Thank you so much for your effort!

  4. braddeicide says:

    Devaluing the dollar fixes large debt

  5. Kiril Mihaylov says:

    Yes it is a big problem.

  6. Will K - Politics/Culture says:

    Warren Buffett said stocks are cheap based on current interest rates…

  7. Tony Steel says:

    America would go to war before it chose to fully honor its debt! 🇺🇸

  8. Greg Kamei says:

    Thank-you for a clear & understandable presentation. It seems like the debt bubble has shifted from sub-prime mortgages & car loans to school loans. It's scary to imagine what will happen to all kinds of debt when rates rise significantly.

  9. Ramon Uy says:

    Absolutely debt is no good , especially when it can't be paid back !!!!

  10. RicoSuave Investing says:

    Scary

  11. Arsalan Yousuf says:

    Great video. Keep it up. Soon you will cross 100k so subscriber!!! 😀

  12. George Hadley says:

    Another excellent video, I think your presentation skills are some of the best on YouTube. As a foreign investor I have watched as the total U.S. debt has risen inexorably with no effect on the financial markets. My guess would be that this debt problem won't be solved in a gradual manner but at some point in time there will be some kind of collapse and the debt holders will be the losers.

  13. Philip Davies says:

    10%+ of young people being 90 days past due in college savings is so sad and is going to ruin them. Maybe a cap on interest and fees of say 30% of the principal? This way they see a end game and they start making payments again.

  14. Jong Uk Bae says:

    It sounds that we are going to have a new currency soon like 'Libra."

  15. Jeroen says:

    Some thoughts:

    the US government budget deficit is completely out of control and isn't likely to get much better as the US is getting increasingly populist. Above 100% debt to gdp also seems to be the trouble where economies become hijacked by debt. (looking at Europe and Japan). Big problem although might not materialize for a while.

    Households seem to stronghold of the US economy. Alot of this is probably because historic low unemployment allowing deleveraging form the 2008 debt peaks.

    Student debt is not yet a massively weighing hard on the economy as most graduates currently have jobs. But rate at wich student debt is increasing is incredibly concerning as more new households will less free income to spend in the future.

    Corporate debt has also skyrocketed since 2008 so many corporations depend on good buisness condition.

    It seems to me like the strong job market is currently holding everything together. A reverse in job growth could mean real trouble.

    If a credit tightening occurs the US will probbally need inflation to help them out. QE will almost certainly return.

  16. David Armstrong says:

    I think you skipped over the biggest problem, the corporate bond bubble. This is where the next crash will start.

  17. Dave7mm08 says:

    If your investment horizon is long enough, there's no need to wait for a crash/correction. If you can time the market (though I don't think this is what you really mean), please share the secret

  18. Luis Rivera says:

    Was there any policy changes regarding auto loan approval requirements after the last recession? My impression is that even though it is now a lot harder to get a loan approved to buy a house, it is still very easy to get a loan to finance a car. Am I assuming wrong or could this also be part of an explenation on why the increase of auto loan delinquencies? BTW, great content and format!

  19. Horazon says:

    Its nice to get money out and be used to growth etc. Some debt its fine. Problem is inflation.

  20. Marc Minicuci says:

    wow man great video!

  21. George Hadley says:

    Congratulations on reaching 20K subscribers. If your videos keep up their past quality I've no doubt that subscriber numbers will continue increasing exponentially.

  22. Jin Liu says:

    Congrats to 20k subs! Videos are informative as always. Thanks a lot!

  23. Passive Income Tom says:

    This was really good information Jimmy. I think the student loan debt and also social security will come back to bite the US since no president wants to tackle these issues.

  24. begley09 says:

    Students are banking on a bail out especially with Bernie Sanders comments.

  25. Sarkis Kalfaian says:

    I believe a recession won’t be as hard as 2008, best way to keep invested and hedged against inflation after all with all these printing money it will haunt us.

  26. Joseph Morales says:

    College now a days – What a JOKE

  27. dlee t says:

    @2:21 the debt increase showed was when Reagan surrendered the high marginal tax rates that kept capital from being hoarded and was spent on maintaining a consumer base by funding infrastructure and civic investment. Reagan's mission to destroy the middle class is almost complete. Mitch let red state governors kill entitlement recipients by denying free Medicaid expansion in his GOP ACA amendment.

  28. The Broke Broker says:

    Love your stuff what’s your job or background if I may ask and could u do a vid on your portfolio sometime

  29. Lycan Thorpe says:

    WW2 took us out of the Great Depression … WW3 will get us out of the Great Debt Collapse

  30. C B says:

    Debt does not cause a recession to happen and our economy doesn’t come out of a recession because people have paid down their debt. Correlation does not equal causation.

  31. Positive Investing says:

    Great video Jimmy and congrats on 20k subs – well deserved!

  32. David Hernandez says:

    Good take on debt. Don't forget corporate debt… It sure will be a dominos effect problems. But again what do i know am just an average Joe.

  33. over07ful says:

    They will play kick the can with debt as they do with all other issues. They will try in vain to print free money to pay the bills until inflation shows its head. When that happens the gov't will be forced to raise rates to combat the threat of stagflation. I'm old enough to remember our stagflation under fed chairman volker. He raised rates to 18%, yes you read that right. That was not a typo. If we get within hailing distance of that your stocks will be wiped out. When inflation starts to creep up you need to start selling stocks and start buying short term bonds. Just watch for inflation. This will be a buying opportunity of a lifetime. Your welcome

  34. George Emil says:

    What country in this world has no debt? When did it all this debt start? WW1? 1980s with tax havens and tax breaks?

  35. Brad Harris says:

    Lower interest rates to -25% …All Debt problems solved!!!

  36. Mint Mark SI says:

    I used to think this couldn’t go on, I thought this is going to blow up it has to.

    Now I think who knows maybe it will go on longer than all of us are alive. Besides It’s not just the USA the entire world is awash in debt

    I sure hope I’m not around to see this finally blowup because I think when it does.

    Millions and millions will more than likely die.

  37. James Z says:

    Hi Jimmy, Love your video very much, and thanks for helping us invest! could you do Costco? thanks!

  38. Paulo Mateus Guerra says:

    I think that when you as, an individual, have a debt is hard enough to overcome it, imagine a hole country that is in an ideological doomsday war and powerful people wanting to stay in power as powerless ones wanna become powerful. I would still invest, as I am investing because it is worse not to. Maybe upper my hand on solid REITs or/and essentials just in case. That does not solve the problem but for the long run it maybe worth it.

  39. Curt Christiansen says:

    How many of those with the student loan debt are choosing to not pay it in hopes all of us tax payers will pay off all their loans for them?

  40. horrifiedheartlander says:

    The most recent jobs report will miss expectations. Could this be a turning point typical just prior to recessions? Poor to fair wage growth has contributed to increased levels of personal and household debt. Will lowering interest rates help businesses that detect lowering demand for their goods and services (as evidenced by falling PMIs globally)? With interest rates historically low already, history suggests not so. Debt will be one factor that portends a growing lack of demand for economic output. In the everything bubble, it will be declining corporate earnings and a scare of default in junk bonds by the many "zombie" corporations that will burst it.

  41. Matt McCracken says:

    No mention of corporate debt?  I think that's important, especially given all the share buy backs over the last decade.

  42. Kevin Doty says:

    Good video. One suggestion: when showing charts, label the Y axis so the viewer has a better understanding of what's being plotted.

  43. Phone Excel Time says:

    Everybody is Saying that Global Financial Recession is Coming Again but " When it is Coming is the main Question???". I have been watching such videos from a very long time.

  44. Gabriel Casanas says:

    Can you make a video about the price of dollar and how it trends opposite to the price of gold? I have seen that gold has been going up but looking at USD currencies I havent seen dollar going down. Notice that I'm not an experienced investor

  45. Zoltán Kiss says:

    This overdebting of students and people can lead to the rise of extreme left politicans, who will make the whole investment climate unattractive. On the other hand this debt problem can be solved by a higher inflataton, therefore stocks are good to invest.

  46. Tibor Z says:

    Hi, just asking what's your background?

  47. Tibor Z says:

    I am new to the channel.

  48. Tibor Z says:

    Rates will be lower for longer. Debt monetization by Central Banks, inflation, QE, helicopter money, TLRTO for banks not to create a bank insolvency. And than let inflation run, to inflate the debt away. Well, if you as an individual will be wiped out that's not their problem. They have to create a new balance sheet, a fresh start for countries. That's the main goal. Politicians and central bankers are helping each other because they depend on each other.

  49. Tibor Z says:

    I belive there will be a higher double digit inflationary to force central banks for rate hikes. Of course in that case asset prices will be deflated.

  50. Hugh Clinger says:

    Stop investing, go to cash

  51. tomte47 says:

    Current Defecit is over 1 trillion and rising. Yes the U.S is borrowing more money then the whole military budget every year. So not only is the debt high it is increasing at a faster rate all in a time when the economy is doing well. What happends when you get a downturn in the economy ?

    No one has the political will to deal with this, raising taxes and cutting spending aint gonna get you elected, Trump will continue to pump borowed money into the economy to keep it proped up untill election and i doubt any democrat will cut goverment spending by 30% which is whats required just to break even let alone start paying back the debt.
     
    Even a hint that they will try to print there way out of this is gonna cause many countries to ditch there dollar reserves for a basket of other curencys causing the dollar to plumet before they even started the printing.

  52. Jim Johnson says:

    The system is designed to fail and bring you with it. Work be for play is the problem here. If you dont pay off your house the day you buy it you will never beat the system. You cant borrow your way out of debt.

  53. ManuelPinner says:

    Don't Use Credit Cards and Don't have a Car!

  54. Marcus Simon says:

    You touched on it a little bit but its also worth considering that if the us enters a recession the debt/gdp will instantly look even worse and the budget deficit will explode even more.

    Especially if we enter a inflationary depression and interest rates begin to rise. The us government has been playing a high risk game right now

  55. niclasthan says:

    Wouldn‘t be hyperinflation a way to lower debt?

  56. Dennis Turbay says:

    Hi, could you please suggest any good book or courses that cover basics of finances and economics? Your videos are amazingly interesting, but they assume understanding of the very basic concept/ideas/laws.
    Please make a video that tells – minimum you should know to fully understand all my videos. Thanks for your work!

  57. Cal Commercial Insurance says:

    One of the benefits of setting the interest rate on the debt you owe is you can always lower the interest rate. Interest rates won't be going up anytime soon because the debt our nation has will not allow for that. As long as we have this much debt, the interest rate will stay down. Count on it.

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