Piles of Debt and Nothing to Show for It

Piles of Debt and Nothing to Show for It from Schiff Gold

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TDC Note – I have argued for well over a year, if not two years, that while a lot of analyst insist that China is going to “crash and burn because of their debt load”, while ignoring the U.S. debt load – with no way out or payoff – I have been saying China at least has “stuff” – new nuclear power plants, hydroelectric dams, trains/railway systems, solar energy for 300 million homes and the list goes on. What does the West have for the debt we have incurred? student loans (worthless degrees), car loans (for an item that loses value the moment it is purchased), home loans (enslaving people to the banks). Aside from homes, the other two major sources of debt, at the personal level, have zero value. At the federal level the only “thing” we have to show for the massive debt is war and more war. If you compare the U.S. and Europe to China what has a better chance of being successful in the long term? You can not build a future on illusions and mountains of debt.

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The debt time bomb continues to tick. There is growing evidence that we’re getting close to an explosion.

And what do we have to show for trillions in borrowing?

Not a whole lot.

A Bloomberg article published this week proclaimed America has a debt hangoverresulting from a half decade of “binging on credit.” The percentage of overdue debt has risen two straight quarters and consumer companies say customers are under stress. On top of that, bankruptcies are rising.

Americans faced with lackluster income growth have been financing more of their spending with debt instead. There are early signs that loan burdens are growing unsustainably large for borrowers with lower incomes. Household borrowings have surged to a record $12.73 trillion, and the percentage of debt that is overdue has risen for two consecutive quarters. And with economic optimism having lifted borrowing rates since the election and the Federal Reserve expected to hike further, it’s getting more expensive for borrowers to refinance.”

Americans with debt at least 90 days delinquent rose to 3.37% in Q1, according to data from the New York Federal Reserve. The last time delinquent debt increased in two consecutive quarters was Q4 of 2009 and Q1 of 2010.

This is all bad news for an economy built on consumer spending. It appears many Americans are cash-strapped. In fact, consumer spending showed the weakest gain since 2009 in the first quarter of this year. Wages remain stagnant, and rosy unemployment numbers hide a major problem in the jobs market. Many Americans have simply dropped out of the labor force, or are working part-time, low paying jobs. Nearly half (46%) of Americans surveyed by the Federal Reserve said they could not scrounge up $400 to pay for an emergency expense, according to a 2016 report.

The Bloomberg writer even flirts with the root of the problem. He points out the Federal Reserve kept rates low “to encourage companies and consumers to borrow more and to spur economic growth.” Yes, central planners intentionally orchestrated the looming debt crisis. Now it’s time to pay the piper.

As we reported last week, the Fed’s efforts to”normalize” rates, will put increasing stress on Americans saddled with debt. Higher interest rates mean it will cost more to service all of the debt.

And it appears all of the debt is beginning to take its toll. Both consumer and commercial bankruptcies are on the rise after falling for years after the financial crisis. Total US business bankruptcies in May rose 4.7% year-over-year to 3,572 filings, according to the American Bankruptcy Institute. That represents a 40% increase from May 2015. Business bankruptcies are up 10% from May 2014.

Personal bankruptcies also jumped in May, increasing 5.4% y-o-y.

More concerning is that typically bankruptcy filings fall in April and May in a seasonal cycle. Filings did fall in April as expected, but the May report represents a significant deviation from the norm. The May jump could be a warning sign of an upward trend in bankruptcies. That would certainly fit in with the data showing increasing delinquency rates.

And what have we gotten for all of this debt? Danielle DiMartino Booth, founder of an economic consulting firm and a former adviser to former Dallas Federal Reserve president Richard Fisher, summed it up pretty well.

This household credit cycle has been defined by the advent of all kinds of new types of unsecured lending. And for a lot of those borrowers, they have nothing to show for it.”

So, could the debt chickens be coming home to roost? That remains to be seen. But it’s certain that the massive debt bubble can’t remain inflated forever. At some point, whether sooner or later, it will pop. And it’s going to have disastrous effects on the economy.

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Peter Schiff

Mr. Schiff began his investment career as a financial consultant with Shearson Lehman Brothers, after having earned a degree in finance and accounting from U.C. Berkeley in 1987. A financial professional for more than twenty years, he joined Euro Pacific in 1996 and served as its President until December 2010, when he became CEO. An expert on money, economic theory, and international investing, he is a highly sought after speaker at conferences and symposia around the world. He served as an economic advisor to the 2008 Ron Paul presidential campaign and ran unsuccessfully for the U.S. Senate in Connecticut in 2010.