Is the United States the wealthiest nation in the world? Sure, it is the largest economy – but when governments, households, and companies are drowning in debt, it’s hard to ascertain America’s fortune. All the numbers point to something out of The Picture of Dorian Gray: a beautiful economic model outside but a hideous portrait hiding in the attic. Indeed, one look at the Treasury’s data and another peek at consumers’ red ink deserve a trigger warning for how devastating they genuinely are for today’s and tomorrow’s generations that will be forced to foot the bill with a devalued dollar, immense tax bill, and/or substantial spending cuts.
In Debt We Trust
For the first time ever, total household debt topped $17 trillion, according to the Federal Reserve Bank of New York’s quarterly Household Debt and Credit Report. In fact, it was $17.05 trillion in the January-March period. This was primarily driven by mortgages, which climbed by $121 billion to $12.04 trillion. This was followed by quarter-over-quarter increases in auto loans ($1.56 trillion), student loans ($1.6 trillion), credit card debt ($999 billion), and home equity lines of credit ($340 billion).
But while the quarterly and annual changes in debt garnered all the headlines, the flow into serious delinquency was the real eye-opener. On a year-over-year basis, rates of 90 days or more delinquent climbed at a significant pace in the first quarter. The most jumps were delinquency rates for credit card debt (3.04% to 4.57%), auto loan debt (1.61% to 2.33%), and “others,” such as retail cards and other consumer loans (2.88% to 4.35%).
These numbers could worsen in the coming months, the Federal Reserve Bank of Kansas City warns. Economists at the regional central bank noted that once wage growth slows, delinquency rates would likely rise even higher, “especially among subprime borrowers.”
That said, even in an economy of full employment and strengthening wage rates, half the country lives paycheck to paycheck. The most recent data on the subject, originating from a co-authored report by LendingClub and PYMNTS.com, show that 60% of US consumers lived paycheck to paycheck in March 2023. It makes sense, too, as the cost of living remains high and hourly and weekly earnings have lagged behind inflation for nearly two consecutive years.
Consumers are not optimistic that conditions will improve. The latest numbers from the University of Michigan and the New York Fed Bank show that Americans think inflation will remain well above the Eccles Building’s 2% target rate for the next one, three, and five years. This could spell bad news for the broader economy because if inflation is embedded in the economic landscape, it could slow growth and lead to a recession.
A Fiscal Tragedy
The health of the consumer’s finances is wretched. But Uncle Sam has it a lot worse! Washington is embroiled in a debt ceiling showdown. House Republicans want to reduce spending to 2022 levels, but the current administration argues that the limit needs to be raised no matter what. So, the American people can grab a bowl of popcorn or a glass of sherry for this political theater spectacle that will be magically resolved with last-minute negotiations and wheelbarrows of pizza boxes. But perhaps the real story in all of this is how the federal government’s finances are in a state of disrepair and are unlikely to be healed anytime soon.
Chuck Schumer (Tom Williams/CQ-Roll Call, Inc via Getty Images)
Here is the tale of the tape: $32 trillion national debt, $925 billion federal deficit (first seven months of the fiscal year), $663 billion in interest payments (projections from the Congressional Budget Office), and approximately $200 trillion in unfunded liabilities and expenditures. The amount of red ink Republicans and Democrats have accumulated equals roughly $100,000 per citizen or $250,000 per taxpayer. And these figures are not expected to improve anytime soon, as even the White House’s budget forecasts for 2033 pencil in a $50 trillion national debt, trillion-dollar federal deficits (CBO estimates $2.9 trillion in the next decade), and annual debt-servicing payments exceeding $1 trillion.
What’s more, these dollars and cents do not factor in vast debt volumes at the state and local levels.
Democrats will assert that America must never default on its debt, although the government has done this four times before. Republicans will demand spending cuts, despite their proposals being a drop in the ocean-size bucket. Economists, finance experts, and voters will aver that not increasing the debt ceiling would dramatically affect the nation. Because this has never happened before, the ramifications are still being determined. But one thing is certain: the enormity of the debt, which is unlikely to be remedied anytime soon by the so-called adults on Capitol Hill.
Unsustainable
Is it sustainable for consumers to continue living paycheck to paycheck without emergency savings? Is it feasible for the US government to maintain tens of trillions of dollars in debt while servicing this red ink with trillion-dollar payments each year? Indeed, some economists might profess that these instances are perfectly viable as long as x, y, and z occur. This is why legendary conservative thinker William F. Buckley said he would prefer to be ruled by the first 100 people in the Boston phone book than the Harvard faculty. Unfortunately, logic would dictate that these circumstances cannot be sustained in the long run. Of course, households understand this, so they are typically more anxious about their finances. But politicians need to realize they cannot tax, print, and borrow to infinity. Except for Rep. Brad Sherman (D-CA), who recently claimed during a House committee hearing that the US government can create money out of thin air. If only commoners possessed a magical printing press in their basements!
