US President Trump, known for his modesty, twittered yesterday: “BEST USA ECONOMY IN HISTORY! And right he is! The economy is growing, unemployment is as low as inflation. But growth is being bought with masses of credit and inflation is taking place in the stock markets instead of supermarkets. (Book: World Power USA – has the decline begun?) The debt has long since exceeded the level of 2008, the year of the financial crisis. For investors this means, not least in view of the all-time highs on the stock markets, that they should now act more cautiously.
The government’s new debt alone could ensure double growth in the USA
Trump likes to attribute all good economic data to the fact that he is president. He can do that, but he doesn’t have to. The economy is currently growing at 2.3%. Inflation is also at that level, while the official unemployment rate is only 3.6%. These are very good figures. Less nice is the fact that the US federal government is taking on 4.6% of the gross domestic product in new debt every year. In other words, Trump is pumping 4.6% into the economy in the form of credit-financed spending, making only half as much economic growth. And these are just the loans that the federal government takes out. If new debt is twice as high as economic growth, this also increases overall debt, which already amounts to 107% of gross domestic product.
In addition to the government’s debts, there are of course the debts of businesses and consumers. And quite significantly, given the low interest rates. While companies have for some time now been taking themselves off the stock market on credit (aka share buyback), consumers are consuming on credit. Repayment of the loans is less often thought of. Or how can it be explained that people over 60 years of age in the USA now hold more than 100 billion US Dollars in student loans? Those who will not be able to pay off their student loans in 35 years have obviously either overextended themselves during their studies or have not thought about repaying their loans during their working life. But it gets worse. US consumers have increased their debt by 4.4% within a year. In total, the 330 million US Americans now have more than 14 trillion US Dollars in debt, which is already 70% of the gross domestic product.
From 15.8% credit growth to 2.3% economic growth in the USA
Now the bill will be totally unfavorable to Trump. Trump’s government is pumping 4.6% of GDP into the economy as new loans. Consumer credits will increase by 3% of GDP. And out of this 7.6% new credit that was issued, only 2.3% economic growth came out in the end. And then there are the companies that hold another 47% of GDP as credit. The volume of credit has recently grown by 5.3% per year, which, extrapolated to the total gross domestic product, could already be sufficient for 2.3% economic growth. At least if every new US Dollar credit would also generate a US Dollar economic growth. In fact, a total credit growth, which corresponds to 9.9% of the gross domestic product, only became 2.3% economic growth. This does not look like the “Best USA Economy in History” anymore.
But it gets worse. In total, the USA is sitting on 74.6 trillion US Dollars of credit. A sum that grew by 4.5% in the past 12 months (Q3 2018 to Q3 2019). Since the volume of credit is almost four times the economic output, this 4.5% credit growth is already 15.8% of GDP. Thus, 15.8% was converted into only 2.3% growth. Total US debt is now a good USD 20 trillion larger than in Q3 2008.
Some 11% of loans are no longer repaid in the USA
None of this would be a problem if the debtors were to meet their obligations. But it is obvious that this is not possible. If the amount of credit increases by 15.8% of GDP, but GDP itself only by 2.3%, and if at the same time more and more assets are concentrated in the top 10% of the US population, then it is inevitable that a large part of the population will have to dedicate an ever larger share of income to debt servicing. And when that is no longer sufficient, private bankruptcy ensues. In the meantime, 5% of all car loans have not been serviced for more than 90 days. And 8.4% of all credit card debt is overdue. In the case of student loans it is even more than 11%.
The 2008 financial crisis was triggered not least by the fact that more and more debtors were no longer able to service their debts. Even then, the stock markets were quoted at or near their all-time highs. We now have all-time highs again, massive credit growth generating strongly disproportionate economic growth and increasingly defaulting debtors. What could possibly go wrong?