Exceptional work here from economics writer George Melloan, a one-time member of the Wall Street Journal editorial board and an one of the few who really understands the role currency, interest rates and the Federal Reserve plan in setting the nation's fiscal course.
But within a piece that deals with a fair amount of esoterica, Melloan almost matter-of-factly gives us a jaw-dropping fact: This nation is absolutely drowning in debt:
Lacy Hunt, an economist with Hoisington Investment, estimated at a recent conference held by Grant’s Interest Rate Observer that debt of all kinds in the U.S. now totals more than $69 trillion. That’s more than double the $30 trillion recorded by Fed statisticians as recently as 2000. If the Hunt figure is correct, then total debt is now about 370% of GDP, up from 294% in 2000.
But foreign demand for American debt is showing signs of weakness. China has traditionally used most of the dollars from its large trade surplus with the U.S. to buy Treasuries. But Beijing’s foreign-currency reserves are declining as business slows, the financial system grows more unstable, and capital flees the country. In January China’s reserves dropped below $3 trillion for the first time since 2011. Total dollar holdings by foreign central banks have fallen to around $2.8 trillion today from $3 trillion in late 2013.
Domestically, consumer credit outstanding fell sharply after the 2008 crash but began rising again in 2013. It is now up 29% from five years ago—and 16% not counting the blowout in government loans to students. The Fed’s latest survey of senior loan officers indicates that demand for mortgages is slackening and that the “quality” of auto and credit-card debt is shakier. This suggests that many consumers have maxed out their ability to borrow. The report also notes that banks are tightening their lending standards on credit cards and auto loans.
The famed 1930s economist Irving Fisher taught that a credit cycle ends when both lenders and borrowers pull in their horns, which is what may be happening now. He wrote that the end of a credit cycle signals a downward turn in the business cycle. If so, the current bull market in stocks is also at risk.
$69 trillion! That's astonishing. And it doesn't even take into account unfunded entitlement obligations
He's not talking only about the national debt, which is approaching $20 trillion. He's also talking about debt held in the private sector, much of which is financed by overseas sources. You hear a lot these days - including from some in the new administration - that this is no immediate problem, and if anything this is a great time to go into more debt to finance infrastructure spending because interest rates are so low.
The people who are saying that are missing some important details. For one thing, a lot of debt-financing is short term, such as notes that mature in four or five years and have to be either paid off or refinanced. Interest rates might be low now, but will they still be that low when the debt needs to be refinanced? Because if it can't be paid back immediately - and in almost ever case, it can't - that low interest rate you're enjoying now is going to turn into a much higher one.
Then, as Melloan points out, there's the matter of whether foreign financiers will really want to continue buying U.S. debt over the long term. Maybe they will, and we can only hope the terms remain at least manageable for us if not favorable. But there's no substitute for being able to pay as you go and not having to rely on solid demand and favorable terms from lenders. The U.S. hasn't been in that position for a very long time.
But leaving all that aside, just look at that raw number: $69 trillion! That's astonishing. And it doesn't even take into account unfunded entitlement obligations.
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I believed before the election that if Hillary won, it would make the collapse of this nation inevitable
I believed before the election that if Hillary won, it would make the collapse of this nation inevitable, precisely because the mounting debt is a situation that simply has to be addressed immediately, and there was no chance she would do so. The fact that Trump won, and Republicans now control all branches of the government, means they have an opportunity to reverse course on this fiscal disaster. But it is not a guarnatee that they will do so. I for one think it's possible to increase spending on infrastructure and still balance the budget by making very difficult choices about other aspects of the federal budget.
But I have yet to see a plausible Republican plan to do all that. The need for it is more urgent than the political class and its media megaphones would have you believe, and because of that congressional Republicans may not feel a lot of pressure to get spending under control. In fact, if anything, they may feel pressure to keep the spending party rolling.
They'd better resist that pressure. Otherwise my dark prediction about the future of this nation will come true, Trump or no Trump.
