If you’re like me, you were introduced to debt as a young adult when you applied for student loans. I remember cutting my first check to the University of California at Irvine and, years later, I flirted with the idea of mounting my last canceled draft on the wall of my cubical at work, the way saloon-owners do with their first dollar.
Since then, the value of student loans has skyrocketed to $1.4 trillion. Without downplaying the social, economic and moral consequences of saddling our nation’s youth with such an obligation, however, it’s worth noting that the size of household debt—of which student loans are a large part—has actually diminished since the 2008 financial crisis.
If fact, the whole spectrum of American debt—which we citizens demonize even as we credit-binge—is less onerous and thus less pernicious than some of our political-economic elites would have us believe. Rates of corporate leverage today are no different than they were in previous expansion cycles. Meanwhile, the interest cost of the federal debt—which accounts for half of US indebtedness—is a mere 1.3% of GDP, a ratio not much higher than it was during the expensive post-war Eisenhower era.
These are among the conclusions unearthed by the market blog The Fat Pitch in a provocative challenge to our biases against debt. The most resilient trope—that excessive red ink and gearing can retard growth—is the easiest to debunk, it argues. When Japan’s debt-to-GDP exceeded 100% in the ten years beginning 1996, its real GDP grew 11%, which, after factoring in Japan’s GDP relative to its working age population, is similar to the US over the past 25 years.
That and many other examples, argues the Pitch, suggest that “while US federal debt/GDP has grown over the past 30+ years, leverage ratios are not high and there is no empirical evidence suggesting current debt on its own is a risk to future growth.” That includes the tax cut signed in 2017 that is expected to add some $1.5 trillion to the public dole.
Debt payments as a percentage of disposable personal income are a similarly easy carry, according to the Pitch. On a per capita basis, the volume of household debt is in line with 2004 levels, while household debt relative to consumer net worth hasn’t been lower since 1985. Not only that, household assets are roughly seven times larger than total liabilities and, were asset values to return to the lows of 2009, would still be nearly 4.5 times current liabilities. Household loan delinquency rates are near multi-decade lows.
A telescopic view renders the same perspective when trained on corporate debt. Corporate leverage peaked in the early 1990s and since then leverage has largely stabilized. Today, corporate borrowings are not significantly different than at any time during the prior three expansion cycles.
Despite hand-wringing about proliferation of Covenant Light loans and high-yield bonds, the Pitch argues that corporate leverage is not hazardous because, not unlike household assets, corporate net worth is about four times larger than the debt and delinquency rates are at their lowest level at any time during the prior three expansion cycles.
The Pitch coolly imposes historic data to place our parochial conceits in perspective, a service all the more vital in this foul era of social media and the 24-hour news cycle. Having said that, the article is conspicuous for what it omits. Penned before the new Fed austerity, there is no reference to how debt service will be altered in a high-interest rate environment. Nor does it mention the policy gorilla in the boardroom: the dollar’s staying power as the world’s reserve currency. Perspective goes both ways, after all. Why bother mining the past for insight only to neglect the future?
However compelling the Pitch may be, the dollar is widely regarded as the reserve currency for want of an alternative, and as a result the US government is famously cavalier when it comes to fiscal priorities. (Thanks to both parties, I might add, as budget enlargement is one of the few bipartisan endeavors left in Washington). While Washington may take dollar supremacy for granted for now, so too will the Chinese yuan continue its evolution toward full convertibility and legitimate fiat status. As demand for yuan increases, creditors may demand a premium for exposure to ever-indebted America. That, in turn, may compel policymakers to make the kind of hard spending choices they’ve been deferring for generations.
Time will tell. Meanwhile, we in the trade will keep doing what we’ve been doing since Ike was golfing in Augusta: investing in human enterprise that grows the economy at rates greater than the interest on capital. Largely as a result, Americans on the whole enjoy unparalleled standards of living. The challenge is to export that model minus the occasional meltdowns triggered by asset bubbles of our creation.