By Jamie McGeever
ORLANDO, Florida (Reuters) – U.S. debt Cassandras can point to news of the country’s record household debt figure last week as yet another sign that the day of reckoning for the heavily indebted nation is fast-approaching. But zoom out, and the bigger picture is rather less alarming.
New York Fed data showed that household debt was $18.04 trillion in December, a sum that covers all borrowing including mortgages, credit cards and auto loans. That was up 0.5% from September and is almost $4 trillion higher than pre-pandemic levels in late 2019.
With public debt also at record high levels and interest rates seemingly staying higher for longer, the painful end of America’s unsustainable borrowing binge appears to be drawing closer.
But that’s only a sliver of the U.S. debt story. Surprising as it may be to many debt doomsayers, the aggregate total level of U.S. debt, spanning all sectors, has not changed much as a share of GDP for 15 years.
(RELATIVE) RUDE HEALTH
Overall U.S. debt peaked in 2009 at a then-record 252% of GDP and stayed there until the pandemic when it topped 300%. It has been shrinking ever since and in the third quarter of last year it was 260% of GDP.
Of the four sectors – federal, state and local, business and household – three are in relatively good shape and improving, according to national accounts data from the Federal Reserve.
State and local debt as a share of GDP was around 11.5% in the third quarter of last year, one of the lowest shares going back to the 1950s. And it only represents 4% of the whole U.S. debt pie, the smallest on record.
Household debt as a share of GDP is below 70% for the first time in nearly 25 years, and excluding the anomalies around the pandemic, American households’ net worth, at 778% of disposable personal income, has never been higher.
Corporate America’s balance sheet is in relatively good shape, too. Business debt as a share of GDP is the lowest since 2015.
‘CASSANDRA WANNABES’
The elephant in the room, of course, is federal debt, which has expanded as a share of the overall pie as all other areas have shrunk. It reached 41% in September last year, double where it was in 2008 and the highest since 1956.
As a share of GDP, it has almost doubled since 2009 to 106%.
But if any sector is best positioned to carry that weight, isn’t it the federal government, armed with the world’s reserve currency and the deepest and most liquid financial markets on the planet?
“We’ve been talking about it [U.S. debt] for 40 years, but why hasn’t it mattered? The reason for that is we’re the reserve currency of the world, but more importantly, our Treasuries are the lifeblood of the entire financial system,” ‘Big Short’ investor Steve Eisman told a conference in Miami last month.
He has a point. U.S. recessions have typically been preceded or triggered not by high levels of federal debt, but by bloated household or business borrowings. Business debt as a share of total debt was historically high in 1974 and the early 1980s, right before and amid significant economic downturns, while household debt reached a record peak in 2007.
True, there are good reasons for caution about U.S. households. The labor market is more likely to weaken from here than strengthen, interest rates may not fall much, and a historically low personal savings rate offers little buffer if unemployment picks up.
But as David Kotok at Cumberland Advisors suggests, America’s overall picture is simply not a cause for alarm. Despite everything that has been thrown at the U.S. since 2009 – COVID-19, an inflation spike, Russia’s invasion of Ukraine, a regional banking crisis, an energy shock, a historic Fed tightening cycle and more – the debt/GDP ratio has hardly changed.
“Cassandra wannabes will be right someday. History proves that. But they will be those Cassandra wannabes who are talking about external shocks, not the current size of the national debt and deficit,” Kotok wrote last week.
And given how many external shocks the U.S. economy has withstood in recent years, someday may be very far away.
(The opinions expressed here are those of the author, a columnist for Reuters.)
(By Jamie McGeever; Editing by Andrea Ricci)
