A new milestone on the American populaces’ collective pursuit of insolvency was reached this week. According to a report published on Tuesday by the Federal Reserve Bank of New York, total U.S. household debt jumped to a new record high of $12.84 trillion during the second quarter. This included an increase of $552 billion from a year ago.
Moreover, this marked the second consecutive record high on a quarterly reported basis for U.S. household debt. Indeed, this is a momentous achievement. From our vantage point, it is significant for several reasons.
One, it shows U.S. household debt has returned to its upward trend which had previously gone uninterrupted from the close of World War II until the onset of the Financial Crisis in late 2008. Second, it demonstrates that, like the S&P 500, new all-time highs are being attained with the seeming precision of a quartz clock. Is this just a coincidence?
More than likely, it’s no coincidence at all. More than likely, the mass quantities of central bank liquidity that have been injected into the financial system over the last decade have provided the plentiful gushers of cheap credit that have pushed up both stock prices and household debt levels. But remember, the easy stock market gains can quickly recede while the increased debt must first drown the borrowers before it can be expunged.
To understand where the liquidity has come from, look no further than the total combined assets of the Federal Reserve, European Central Bank, and the Bank of Japan. They were around $4 trillion a decade ago. Today, they’re over $13.8 trillion. And if you include the People’s Bank of China’s assets, combined major central bank assets jump to nearly $19 trillion.
A Gigantic Letdown
Of course, record debt and record stock prices were part of the plan all along. If you recall, the clever economists at the Fed promised the hoi polloi their cheap credit policies would rain riches down from the heavens via something they called the wealth effect. We never quite followed the logic of it all.
Per the policy wizards, the wealth effect is what happens when the value of people’s assets rise. When investment portfolios bubble up, consumers feel more financially secure. Hence, they buy stuff they don’t need, and that they really can’t afford, using credit. The increase in spending, in turn, is supposed to stimulate the economy and make everyone wealthy.
Yet the experience over the last 9 years tells a different story. The S&P 500 has gone up 270 percent. However, GDP has gone up just 34 percent. On top of that, median household income has been stuck in first gear for over two decades.
Obviously, the stock market did its part by soaring to record highs. And consumers did their part, by spending their way to record levels of debt. The economy, on the other hand, lunged and lagged. In short, the wealth effect was a gigantic letdown.
On top of that, the Fed now plans to normalize its balance sheet. That’s what they say, at least. This week the July FOMC minutes were released and included a strong consensus for the Fed to begin reducing its $4.5 trillion balance sheet “…relatively soon, absent significant adverse developments in the economy or in financial markets.”
Here at the Economic Prism we watch intently for the Fed to commence its adventures in quantitative tightening. We have an inkling the unwind will be more disruptive than the Fed advertises. Plus, we have doubts the Fed will ever make substantial reductions in its balance sheet before they’re compelled to further expand it due to “significant adverse developments.”
Why There Will Be No 11th Hour Debt Ceiling Deal
Consider that the stock market is poised for a crash like never before. Consider, too, that over the past week – even with yesterday’s selloff – the stock market has shrugged off the North Korea nuclear threat, major civil division, and the collapse of retail, like these doom scenarios were merely the 24-hour flu. But will the stock market shrug off the major financial epidemic that is developing?
While Congress is vacationing on summer recess, a massive fiscal disorder is patiently waiting to bum-rush them upon their return. The Business Insider explains:
“The Treasury Department says the debt ceiling, a statutory limit of outstanding debt obligations that the federal government can hold, must be raised by September 29. That gives Congress 12 working days to pass legislation to get to President Donald Trump’s desk.
“If breached, it could lead to disastrous consequences for the federal government, the US economy, and the global financial system. If the debt ceiling is not raised, the federal government would lose the ability to pay bills it already owes in the form of US Treasury bills and could lead the US to default on some of that debt.
“The possible fallout from a default, according to a study by the Treasury Department, would include a meltdown in the stock and bond markets, a downgrade of the US’s credit rating, which would increase the government’s borrowing costs, and the undermining of the full faith and credit of the country.
“Despite potentially dire consequences, there is confidence but no guarantee that factions in Congress, with a variety of competing interests, will be able to come together on a deal to raise the limit.”
Sure, Congress has always come together at the 11th hour in the past. They’ve raised the debt ceiling 78 times over the last 57 years. So, won’t they just raise it again?
This time around, we have some reservations. Quite frankly, this Congress has proven that it is not motivated to do what’s best for the American people. Each representative has an illogical logic unto himself. Just ask John McCain – he doesn’t know what he wants until the precise moment he votes.
What’s more, these days the debt ceiling has become ultra-politicized in Congress. Big time horse trading must first take place before an agreement can be reached. Big time bluster and chest pounding must take place too.
The point is, over the past six months this Congress has been incapable of getting a doggone thing done. What makes you think they’ll somehow get their act together in just 12 days?
The credit market isn’t…