SA contributor Lance Roberts hopes, though does not expect, that the new administration's policy shifts will lift the economy. Rather, he cites a variety of deeper structural economic problems he sees as immune to easy fixes from policymakers.
It's worth reading the whole article, linked here, but I want to focus on just one aspect of the problem he discusses, namely the problem of debt. (He discusses both governmental and personal debt, and here I address only the latter.)
Roberts argues that reduced consumer spending, which suppresses GDP growth, is the result of consumers being tapped out (in part, coming full circle, because GDP growth is too weak to lift household income.) Indeed, he cites statistics that consumer usage of credit for personal consumption has increased 50% between 1980 and today, rising from 20% to 30% of their expenditures. Just as at the governmental level, increased levels of personal debt burden households with higher servicing costs and effectively limit the capacity for increased consumption. Here's Roberts:
Many families are struggling to meet the service requirements of the debt they have accumulated over the last couple of decades with the income that is available to them. They can only increase that income marginally by taking on second jobs. However, the biggest ability to service the debt at home is to reduce spending in other areas."
This is an awful and ominous trend, and indeed the very rationale for all the discussion we have had of late about eschewing debt and embracing its opposite: savings. The nation and its citizens are drowning in debt, and lest the tide overrun you too, act now to save your financial life. How bad is the problem? Roberts cites statistics comparing today's levels with those of 1982, which is a further reason why he feels that sweeping policy changes from the incoming administration is not apt to have the same impact as the changes instituted by Ronald Reagan after he took office in 1981.
Household debt to income was then 62%; today 130%. The personal savings rate then was 10%; today, just half that, at 5%.
For added scope, at a national level, government debt was then 30% of GDP; today, that is 105%. Total U.S. debt was then 90% of GDP; today it is almost 4 times GDP.
Temptations to behave in a financially irresponsible way are in the air we breathe today, but we can overcome that. The start of a new calendar year is especially auspicious for making a change our future selves will thank us for.
Please share your thoughts in our comments section. Meanwhile, here are links from today's SA:
- Jeremy Josse makes the case that fund managers will go the way of bank tellers after the advent of ATMs.
- Mark Hebner continues his series challenging the efficacy of active management.
- But John P. Reese considers the Dow as a sort of active fund making the case for active management.
- Jeff Miller's Stock Exchange offers three provocative ideas from his panel of four experts, plus one important abstention.
- Douglas Tengdin continues his discussion of the implications of low inflation.
- Roger Nusbaum on the (temporary) decline of hedge funds.
- For more content geared to FAs, click here.