US credit card debt has spiraled to a staggering $870 billion, a new record. The debt pile is going to be of significant concern to fiscal hawks who will be particularly concerned by the fact that the amount is continuing to push higher despite a booming stock market and positive growth in the US economy.
Perhaps what is most concerning is the fact that this historic debt bubble has now surpassed a psychologically concerning level. This level is the 2008 peak of debt around the time of the stock market crash and Great Recession.
Multiple factors contributed to this dubious milestone. A lack of wage growth is a principal factor in people taking on debt, and the old mantra of “keeping up with the Joneses” might also be more prevalent in the age of social media.
Notably, some economists are not too concerned since consumer debt is lower relative to GDP than it was in 2008.
Debt is a Burden to Some, an Asset to Others
The silver lining for all of this is that - broadly speaking - debt is not purely negative for the economy. Household debt - including credit card debt - is a massive benefit to those who are owed those balances.
In many ways, the fact that it has hit a peak is more indicative of people’s confidence in the sustainability of their lifestyles and a positive outlook for the future and job security.
The problem with this argument is that borrowing aggressively and borrowing out of necessity are different things.
Student loan debt is repeatedly neglected by policymakers as a growing risk to the overall economy. By the Federal Reserve’s statistics, massive borrowing to get a degree has failed to provide a good return.
Unfortunately, borrowing merely to go to college at all looks like one of the biggest gambles you can take. The point here is that some people have the choice of taking on massive debt to try and get to the middle class but understand they will be paying it off for the rest of their life and cannot give up on that dream or default on the loans. Just look this harrowing report from a speaker at Harvard.
Sure, attending college is ultimately a personal decision, but you shouldn't underestimate societal pressure as an influence on any generation in history. There is a compelling argument for not going to college in today’s market - a dangerous precedent given that access to education is one of the vital pillars of prosperous societies.
Don't Forget About Chinese Credit Card Debt
Nor is consumer debt a uniquely American problem.
While analysts warn about rising US debt, if you want to find some scary figures relative to GDP, go to Asia. Japan is terrible at 226%, but everyone knows they are all-in on QE. Debt permeates every inch of China, from government stimulus to leveraged stock markets.
Ominously, Oxford’s lead economist, Adam Slater, believes that it's unlikely the Chinese will be to get out of the way of this one, as he stated in an interview with Business Insider:
"Most emerging markets have had credit booms in the last five years, and history suggests that up to two-thirds of such booms end in growth slowdowns or financial crises. Private credit booms have a high probability of ending badly,"
The Chinese debt is overwhelming not because of the volume—more than $34 trillion —but because the figure has quadrupled in seven years (2007–14) @mises
China’s Debt Bomb. https://t.co/4cv3gq7JEU
— Daniel Lacalle (@dlacalle_IA) February 25, 2019
Donald Trump & Modern Monetary Theory
As Donald Trump pumps up US spending in his bid to manufacture world-beating growth, government debt is also a concern.
The president doesn’t want a weak dollar - he absolutely needs it to fund his growing debt pile. It's not entirely his fault, obviously, but his administration has chosen to pour gasoline on an already blazing fire.
Still, many analysts allege that the situation might not be quite as dire as the doomsdayers claim. Modern Monetary Theory suggests a nation like the US could have an even bigger debt load. There are also people who believe that if you treat the US economy as a consumer, then the per capita debt is more sustainable than actual consumer debt.
The problem with this argument is there is a lot of obligations not included in the $22 trillion debt avalanche. Investors have bought into the positive storyline, but hard-landing fears are not conspiracy theories.
The conclusion to the conversation on debt should not neglect an uncomfortable truth: the people who tell you that debt is sustainable are the ones who love servicing that debt.
The US government gives away money for student loans, making college accessible. Universities can charge more, so costs go up. Without putting too fine a point on it, they then make you into an investment. You have to stay in the workforce or default, so you make them a nice income and contribute to the economy.
Consequently, there are ample reasons to think that “sustainable” borrowing levels are probably far lower than the government claims. Debt is marketed a bit like cigarettes in the 1960s: have fun, it's cool, healthy, and everyone - especially the young American consumer - is doing it.
Disclaimer: The views expressed in the article are solely those of the author and do not represent those of, nor should they be attributed to, CCN.