by Zain Jaffer
If you are a business owner trying to assess the road ahead, you need to comprehend many factors including social, political, legal, and economic trends. One of the factors you need to look at on the economic front is the state of our debt, both from America’s national perspective, and also from the personal perspective of majority of Americans. Of course these figures are average figures meaning some people have it better, while some people have it worse. But at least you know how tough the road ahead looks.
Being heavily in debt normally forces people to cut spending, so discretionary products and services often take a cut. The same cannot be said for America’s national spending. It seems that the purchase of aircraft, tanks, bullets, rifles, and other weapons will go on despite our budgetary deficits. For example companies in defense related businesses may not see much impact to their contracts, unless Congress itself cuts spending across the board.
Here are the sobering facts. At present our National Debt as of late August 2023 was around $32.7T versus a GDP of $27.46T, which equates to a Debt to GDP ratio of almost 120%. For those with government contracts, unless Congress decides to cut the allocation for your sector, it seems those will push through for now.
For those business who rely on ordinary American consumers, whether directly through retail or indirectly by supplying retail companies, the situation is a bit more bleak. At present, the total household debt in the U.S. is estimated at $17.1T.
For those who have loans to pay, Americans owe around $12T in mortgage debt. Auto loans are at around $1.6T, while credit card debt is at almost $1T. Personal savings are extremely low after the surplus savings from the pandemic cash injections by the government, and these loans are at extremely high levels.
Sad to say for those who have availed of loans, credit card debt interest is around 25%, new car loan interest around 14%, and a 30 year mortgage is currently between 7.5% to 8% depending on the area and loan provider. For those with student loans, those will be restarting in a few weeks, and that comes in at around $1.6T.
So as you can see, it is not just the Government that has to deal with a mountain of debt. Consumers are also dealing with their own problems. The problem is that a recession is a psychological thing as well. If people think that the economy is slowing down, with all their personal debt problems, they may decide to really live cheaply and cut almost all discretionary spending from their budget, assuming that they can meet the mountain of non discretionary spending they need to pay like groceries, rent (or house payments), loans, utilities, and student loans if they have it.
There are no easy ways to fix this. But higher interest rates and Fed tightening, although designed to cut down inflation to manageable levels, are understandable from an economists point of view, they are causing real pain on the ground.
It doesn’t look like the Government has much of a choice but to ease up on interest rate hikes and do some quantitative easing to help businesses and consumers manage their debt to affordable levels. But Congress and consumers should also learn how to manage their spending so that any lowering of interest rates and quantitative easing won’t lead to a resurgence of high inflation.