Unfortunately, racking up more debt has become commonplace in our current culture.
For instance, over the last 10 years, U.S. debt increased 124%. And last month, that figure stood at $19.846 trillion.
You read that right: $19.8 trillion!
Part of the reason is years of ultra-loose monetary policy by the Fed. At the same time, medical and housing costs surged beyond the pace of income growth.
In fact, during the past 13 years, median household income increased 28%. But medical costs increased 57%, food and beverage prices jumped 36%, housing was up 32%.
It’s no wonder that many Americans were forced to tap various forms of credit to stay afloat. But the debt problem goes beyond revolving debt.
A growing concern – and something I talked about in early May – is the surge in student loan debt, which grew faster than auto loans, credit cards and home equity loan debt combined since 2003.
According to LendEDU, there are 43.3 million borrowers in the U.S. that hold outstanding student loan debt totaling $1.41 trillion.
Taken further, the average college graduate with student loan debt begins his or her career $28,400 in the hole. No wonder the default rate on federal student loans continues to increase and stands near 12%.But what makes the current debt tsunami particularly troublesome is that it spans across the globe.
First-quarter figures from the Institute of International Finance (IIF) pegged global debt at a new all-time high of $217 trillion. That’s more than three times larger than global GDP.
Terrible! And that’s up a mind-boggling $50 trillion over the past decade.
Highlights of the report identified three primary culprits behind the surge in global debt …
1) China was responsible for the biggest increase in growth, with total debt surpassing 300% of GDP. This is partly because the nation used debt to finance growth and now they must pay the piper. In 2016, China’s debt burden grew 2.5 times faster than the economy.
2) Emerging Markets experienced a surge in (dollar) bond issuance, up $2.5 trillion to $18.4 trillion since 2016. And despite massive inflows of capital, IIF notes rapid deterioration in credit quality in the past year.
3) Middle East oil exporters: Many Gulf region nations relied on aggressive new debt issuance to maintain budgets, stay afloat and stem civil unrest.
But this debt, like all forms of debt, has economic consequences. Consider…
Consequence #1: A drag on consumption and a hit to overall demand that is likely to intensify in the coming years. Especially as debt service costs compound.
Consequence #2: Reduced home ownership, which in the U.S. has declined in each of the last six years.
Consequence #3: Enormous debt load has potential to worsen economic class divisions and fan the flames of civil unrest.
What does this mean for you?
The debt-powered steamroller continues to grow and shows little signs of abating, especially at the government level. And as leaders contend with bankruptcy, they’ll do what they do best: Avoid fixing the problem, raise taxes and take on more debt.
Unfortunately, these trends point in one — and only one — direction: The massively indebted governments of the world, including the United States, will ultimately seek to pay off their debts with your money.
And that’s why it’s extremely important for you to diversify your wealth across various asset classes and to avoid buying government debt like the plague.
Good investing,
Mike Burnick
