Hi I'm Jimmy in this video.
We're going to look at the debt of
the United States both debt
held by individuals and debt
held by the U.S.
government.
Ultimately our goal is to try to
determine if we think that
this enormous debt load
of the United States.
We're going to try to determine how
bad it really is for the economy.
And do we think it's going to cause
an economic recession in the near
future. Now this video is somewhat
of a follow up video on a video I
did called Should I invest now or
wait for a crash.
And in that video we walk through
different leading economic
indicators to try to determine
what signs we were getting for the
overall economy and what we thought
might happen to the economy in the
next twelve months or so.
There's a link in the description
below. If you're interested but
basically the result of that was
there are more negative signs than
there are positive signs.
Well many of the comments that I
received in that video talked about
the fact that I didn't include the
debt in the United States various
forms of it.
That's what this video is intending
to address.
So let's start with the overall
government debt.
And as we could see this chart goes
all the way back to 2005 and
you may notice that right about
here. Well debt
started to grow at a faster pace
and clearly that was the result
of the government jumping in after
the during the Great Recession.
Now obviously with government debt
up above twenty two trillion dollars
this is likely to be a bad thing for
the economy but it's not necessarily
as bad as we might think.
A lot of it depends on a few
different things.
So as an example if we were to
have let's say we had 500 of debt
and let's also imagine that we had a
thousand dollars in the bank maybe
that debt is manageable.
But if we had 5000 dollars in debt
that's a lot worse.
But if we also had ten thousand
dollars in the bank maybe that much
debt is in isn't so much worse
depending on how much income we
have. Now this isn't a perfect
example but I think we get the
concept that being said
this is a chart of U.S.
debt relative to GDP.
Now that example wasn't perfect
because GDP isn't the same thing
as having money in the bank.
But either way I think the point
here is that it
looks like things have gotten
significantly worse.
The debt to GDP is way
higher than it has been as we could
see this chart goes all the way back
to 1966 and back
then the government only owed about
40 percent of GDP.
So this is still just government
debt. We haven't even touched
personal debt yet.
We'll come to that in a second.
This is that twenty two trillion
dollars that we just saw compared
to the GDP of the United States.
That's it. Which is last I saw just
short of 20 trillion.
Hence the reason that this is right
over the 100 percent mark.
OK. So this looks bad but this
isn't the whole story or at least
not the only way to look at the
data.
Another way to look at it another
way that I've seen it presented says
something like you can't really
compare debt from 1981
to debt in 2019.
Back in 1981 the 10 year Treasury
bond had a yield of 15
percent while today that's
very same interest rate is barely
more than 2 percent.
And I think the argument is that
well of course the government is
going to borrow more debt when the
cost of taking on additional debt
is so much lower.
And I get that logic
somewhat I'll explain more in a
second but this chart here
this chart is attempting to address
this concept and we could
see that what this chart does is
it adjusts debt
and GDP by
the interest rate.
So when we adjust U.S.
debt according to the cost of that
debt maybe it's not so bad.
So personally I'm
not sure I agree with that concept
all that much.
And by the way I got all this data
straight from the Federal Reserve on
the St. Louis Federal Reserve Web
site download all this data.
That's what these charts came from.
And here's why I don't completely
agree with looking at it
like this.
See to my way of thinking the twenty
two trillion dollars in debt isn't
going to be paid off all that
easily. So yes rates
are low today but if
rates start to go up well let's
say they go up to just five or six
percent in let's say five years.
Well we would get a huge spike in
this number since
the debt isn't going anywhere all
that fast.
And rates are likely to be a bit
more fluid than that.
OK. All that being said let's try to
shift over to personal debt to see
if we can try to determine
where the economy might be going in
the near future.
So this is a chart of total
household debt as a percentage of
GDP.
And I was actually surprised to see
that it has slid so much recently.
Sure I expected the jump in 2008
but I thought that for some reason I
thought that this would have leveled
off by now.
But I do want to point out that
this number the most recent number
that we have is actually the end of
the first quarter. This is the
quarterly number.
So it'll be interesting to see where
we're at the end of the second
quarter right now. It'll be
interesting to see what the second
quarter numbers end up looking like.
Another way to look at this debt is
with this chart.
This is a chart of household
debt as a percentage of personal
income and as you could see this
chart looks very similar to the last
chart. So it seems
that personal debt hasn't turned
higher just yet.
Especially when we're coming off
such extreme highs like we had in
2007.
So there are some other early
warning signs that can help us
predict where some of these numbers
are heading. So this chart this is a
chart of late payments on auto
loans. So as we could see
this number has been rising ever
since 2014.
So what this number is supposed to
tell us is what percentage
of auto loans are people defaulting
on or which ones are more
than 90 days late.
So right now we're just at a bit
over four and a half percent.
What about mortgages.
Well this is what the mortgages
chart looks like.
And as we could see it seems that
mortgages haven't been hurt
just yet.
And if we logic this one out this
actually makes some sense.
See in my view I'm
sure that if we were in a pinch
we're more likely to stop paying our
car loan than we would stop
paying our mortgage.
But what about credit card debt.
See it seems to me that we would
stop paying credit cards right
around the same time you might stop
paying your car your car if
you ended up in a pinch.
This is what that chart looks like.
And yes as we could see in this
chart defaults have been on the rise
for credit cards since 2016.
Now this could end up being a very
bad thing for the economy if it
continues to go down this road.
That being said this is another
one that I'm sure we've all heard
is a very big problem.
This is a percentage of all the
individuals that are at least 90
days late on their student loan
payments.
And this one has been climbing for a
long time and it's been stuck
up over 10 percent
for a while.
To me 10 percent of people
defaulting on student loans seems
like a really really big problem.
Now if we switch this chart over the
total student loan debt what we
can see that in the U.S.
total student loan debt is more than
one point four trillion dollars.
Now the real issue here is
that look at how quickly this is
ramping up.
This is getting very large very
fast and it doesn't even make sense
to try to compare total student loan
debt to something like GDP
because the people who have
attended college and let's say the
past 15 or so years.
Well they're the ones dealing with
the majority of this problem.
So in my mind yes this
specifically is going to be a huge
problem at some point
if student loan debt continues to
rise at this pace for let's
say the next 15 years.
We're going to have a very serious
problem. This is already one
point four trillion dollars in debt.
To put that in perspective currently
the GDP of Canada
I believe is a big low bit over one
point six trillion.
This is one point four trillion.
So at some point this is going to
be a real problem.
So for me the trickiest part
of debt in the United States
is that it's not that easily
corrected.
How do we lower student loans as an
example how do we lower student loan
debt.
Sure there are ways but are
universities willing to lower their
prices do less people
go to college.
What's a good answer to the
student loan problem as an example
and government debt.
Debt is just as big of a uncorrected
problem. It's unfair to say but
a difficult to correct problem.
So at the end of the day I believe
that yes get in the United
States is a big problem.
It's going to be a very big problem.
Now there are some early warning
signs with the credit card debt and
auto loan defaults that perhaps
that's going to be at least part of
the catalyst to maybe trigger the
next recession.
But it's tough to tell for me as an
investor.
I see the debt being a problem but
this debt's been a problem for a
long time and the stock market
continues to rise.
So it's tough to tell what
the government will do to react to
it. What the government will do to
help stimulate the economy but
for me I think it makes a lot of
sense to remain defensive
with our portfolios now
I don't think it makes sense to not
invest but personally
I think that it makes more sense to
be in the safer investment
zone. But a lot of that depends on
our risk tolerance.
But what do you think.
Do you think that it makes sense to
stop investing now.
One thing I think we should keep in
mind here is that the government's
not going to want to deal with
this problem any time soon.
It's possible they just kick the can
down the road.
They could keep rates as low as
possible. Keep printing money
and that could work for a while.
How long. One year two years five
years 10 20.
I'm not sure at some point
it's going to be a problem.
But when
what do you think.
Please let me know in the comments
below and thank you for stick
with me all the way into the video.
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Thanks.