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IntelDigest
LAW – POLICY – FINANCE – MARKETS
INFORMATION FOR THE ENTERPRISE AND INVESTOR
AUGUST 1, 2018
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For several weeks, we have been reporting the depressing facts on the state of Debt around the world, particularly in the American Economy. Sorry, but this information is too important to ignore.
This will be the last issue in the current series on this subject. However, you can be sure that Debt will come up again and again in future issues of IntelDigest.
We intend to go on to other topics of interest in the coming months:
* China, from several angles, over a series of issues
* U.S. Taxes – updates on changes in the law and regulations
* Work in America – a re-examination
* Robotics and Autonomous Vehicles
* Blockchain – new developments
Need for Action
We have laid out incontrovertible evidence that the “powers that be” … whether executive or legislative … must take seriously our National Debt and take action to reduce it. However, the U.S. Congress has shown no willingness to do so over the last 20 years, nor have either Republican or Democratic Presidents since the Federal Deficit began to soar out of control after the 9/11 Attacks.
The subject is too uncomfortable, so they don’t discuss it all!
To close this current series, we’ll just summarize the principal problems in a few bullet points:
* Total government Debt in the U.S. … including federal, state, and city Debt, and “unfunded liabilities” … exceeds $200 Trillion, by some estimates
* We know of no system of mathematics by which these liabilities can be paid off in a normal manner, so some form of “Mass Remediation Event” is likely in our future .. probably within 5-6 years … which will be a staggeringly unsettling event for creditors and investors
* The Congressional Budget Office (CBO) projects that federal entitlement payments will absorb ALL U.S. federal revenues, every year, beginning in approximately 18 years … this assumes that Congress does nothing to modify the Social Security and Medicare systems, in terms of eligibility, benefits, or funding
* Corporations have benefited from the Ultra-Low Interest Rate environment which has been in place for almost ten years, since the 2008 Financial Crisis … some companies have used their borrowing power to rebuild their balance sheets, improve operations, fund innovation, or make new products … however, far too many corporate leaders have put their companies into debt to fund share buybacks, leaving these companies more leveraged as we move into a Higher Interest Rate environment
* Corporate Debt now exceeds 72% of Gross Domestic Product (GDP) … Government Debt exceeds 100% of GDP … Household Debt is at 77% of GDP … Financial Company Debt is at 81% of GDP
* Much of the Corporate Debt is now in the form of bank loans (rather than selling bonds into the marketplace), and most loans are on short maturities of two or three years … so, many companies will have to roll over their Debt at higher interest rates in 2019-2021
* 37% of current U.S. Corporate Debt (of non-financial companies) is below investment grade … that equals approximately $2.4 Trillion
* non-financial companies are now approximately 20% more leveraged than they were at the time of the 2008 Financial Crisis … either having learned nothing from that experience, or willing to have faith that the U.S. government or The Federal Reserve will bail them out of future difficulties
Feel free to look back on this series on Debt in the IntelDigest archive. We have been looking ahead to the long-term prospects for the Economy starting with the May 16 issue (which was actually a re-publication of February 21). And, we have devoted much of June and July to various aspects of the Debt problem.
A prudent use of debt can be a good thing, allowing us to bring the future into the present. Most of us have done that several times during our lives, usually to purchase a home which we cannot buy outright. For most people, an affordable home mortgage is the best use of debt.
A person can reasonably go into debt to pay for education which will raise one’s income and standard of living in the future, or that of his/her children. A company can go into debt to buy a factory or equipment which will help to bring in revenue over the years.
However, the last 20 years has seen businesses, governments, and individuals build up massive amounts of Debt, much of which must be repaid in the near future. It is difficult to see where they will find the resources to do so.
That is why we have referred alternately to a Great Reset or Mass Remediation Event or Debt Jubilee in a few years … something which would be incredibly disruptive, but may well be necessary.
More, in future issues of IntelDigest.