Two recent pieces of related news suggest the Trump economy (of which he boasts incessantly) is built on quicksand. First, personal debt has now reached a level not seen since just before the Great Recession of 2008 brought the house of cards tumbling down.
American consumers now owe a whopping $14 trillion and growing. That includes $9.4 trillion in mortgage debt, $1.3 trillion in auto debt, $1.5 trillion in student loans, and $1 trillion in credit card debt. The total is now10% higher than a year ago.
One can fault people for courting disaster by living beyond their means, a bankruptcy or homelessness just a lost job or a serious illness away. But they don’t borrow recklessly from themselves. The enablers are banks, S&Ls, credit card companies, colleges, all of lending recklessly, And they are in turn enabled by government watchdogs who are asleep on the job or encouraged to look the other way.
Consumers are also not alone in living dangerously. Corporate debt stands at an equally worrying level of $10 trillion, $4 trillion of it in risky BBB bonds just a notch above junk. All of that debt adds up to slightly more than the gross national product of the entire country.
None of this is likely to have happened if interest rates hadn’t been kept artificially low after the Great Recession, but had been allowed to return to normal levels. But the long, slow recovery made the Fed slow to act. They were also egged on by politicians, including, most noisily, the president, demanding a continuation of low rates.
These do people living on a fixed income no favor, but they keep the cost of servicing the federal debt low and help corporate America by juicing the economy and by actively encouraging borrowers to take on more debt and to spend on goods and services they can’t afford. Low rates also allow corporations to take bigger risks than warranted.
Everybody seems to win in this kind of environment until something goes wrong. And something always goes wrong. There is no free lunch, but the biggest pigs don’t always have to pay the bill. The merry-go-round may stall this time because of a failure to secure a trade deal with China, or a slowing economy, or a sudden aversion to risk.
What happens then to corporations that have spent $3 trillion in the last five years buying back stock and issuing bonds? If the credit ratings on those bonds are suddenly downgraded the underpinnings of the company can be shaken. Rising rates can cause defaults by those unable to afford the debt they’ve taken on.
We’ve seen this kind of cascade effect before when a boom is propped up by an unsustainable debt load. In a kind of modern version of a run on the bank if debt is downgraded fund investors may sell and investment companies may find it hard to find enough buyers. Then down, down, down go prices,
This time, the risk may be exacerbated by a cheerleader president whose real estate career was characterized by taking on excessive debt followed by serial bankruptcies when the music stopped. He left his lenders holding the bag, but as president we can hardy want the federal government to behave in so cavalier a fashion.
Still, there is no reason to imagine a sudden embrace of prudence on Trump’s part after a lifetime of practicing risky business. In short, Trump seems unlikely to provide a steady hand on the tiller in the event of stormy economic times. Nor can his usual response — blaming others — be expected to calm the storm.
Individual investors would be wise to batten down the hatches. Or hedge against catastrophe with a Trump economy put. The real problem arises if a storm is really huge. Suddenly there is no safe harbor in which to hide.