Updated – 15th August, 2019
I originally wrote this article at the end of November, 2018. Since then the stock markets in the US and Europe have been volatile but, over the past 10 days, the trend has been very firmly down.
There are a number of factors:
- The level of debt that I described back in November is more dangerous now than it was then
- The US-China trade war shows no signs of stabilising, with tariffs being threatened, then postponed and (no doubt) being slapped on with little warning
- A ‘no-deal’ Brexit is now the most likely option for the UK’s departure from the EU, with serious consequences for both economies
- Political stability is being seriously threatened here in Hong Kong with, at this stage, no clear outcome in sight
- Uncertainty in the US over the direction of interest rates and the economy continues, as Trump and the Fed wage war with each other
- Both the 2-year and 10-year US government bonds went to an ‘inverted yield curve’ this week
- Gold has shown an sharp increase as investors run for a safe haven
None of that is good.
The debt problem that I originally wrote about is, if anything, more serious now, with the recent raising of the debt ceiling in the US and the 2-year budget agreement that Congress passed and Trump signed off.
The figures I’ve given below are now 8 months out of date – and worse than they were back in November.
If you’re not preparing for a recession and all that that implies, you may want to start thinking about putting some plans in place
The original article starts here.
The majority of public commentary on the economy (in the US at least) is positive. The stock market is high, unemployment is low, this is the longest bull market run in history, yadda, yadda, yadda.
But this is a house of cards, and it’s getting ready to collapse.
Let’s look at a few alternative facts (no plagiarism intended):
Debt is the highest it’s ever been
The debt situation is as bad or worse now than it was in 2007 – and getting worse.
Cheap money (low interest rates) has given rise to excessive borrowing at the national, corporate and household level.
In all 3 sectors, debt is higher than it has ever been – and rising interest rates is the storm that’s going to bring everything crashing down.
The ability of all 3 sectors to pay for the money they have borrowed with interest costs climbing inexorably higher is seriously questionable.
Let’s look at some facts:
US National debt
Starting at the top: US Government debt is now standing at around US$22 Trillion. At the current 2.25% interest rate, the cost to the US tax payer is approaching US$495 billion a year – or US$2,005 for every adult.
And since not all adults pay tax, the cost to each tax payer (based on US government statistics) is US$3,565 a year.
But the national debt is currently growing at an estimated rate of more than US$1 trillion a year. So next year every tax payer will be paying US$3,728 – and that’s only if the Fed rate stays at 2.25%.
In fact, the Fed recently indicated that it will go to 3.0% in 2019 – in this case that cost per tax payer climbs to US$4,971.
That’s a 39% increase over what they are paying today.
Very few (if any) wage earners’ salaries are increasing by 39% a year, so everyone is going to be worse off next year.
In the corporate world the situation is just as bad.
The ultra-low interest rates of the past 10 years (since the financial crisis) have encouraged businesses to borrow heavily by issuing bonds. This has resulted in corporate debt now standing at 45% of GDP in the US – a level never seen before, and higher than in either the dot com or housing bubbles.
This level of debt was relatively easy for companies to fund when the 10-year bond rate was below 2%, but the 10-year bond rate is now just over 3% and the trend is upwards.
So corporate America is facing the same advancing storm that’s being faced by the average US taxpayer.
And finally, let’s look at household debt. This is debt that every American household has to service in addition to their portion of the national debt.
Household debt is now running at roughly US$15 Trillion. The only time this has ever been higher was just before the financial crisis – and we all remember what happened then.
At US$15 Trillion, the interest cost at 2.25% is approaching US$345 Billion and, at 126 million households, the cost per household is US$2,726 a year.
If we assume there are 1.5 taxpayers per household, and add their portion of the national debt to the average household debt, you end up with each household carrying average interest costs of US$8,320 a year.
And that’s with the Fed rate at 2.25% (the commercial interest rate on household debt will be considerably higher).
Move the Fed rate to 3%, as foretold by the Fed itself, and each household is in hock for an average of US$11,093 a year in interest costs.
Given that wage increases are virtually static in real terms (taking inflation into account) the outlook is pretty grim.
Companies are laying off workers in large numbers
In addition to increasing interest costs and static wage growth, many large employers are laying off workers despite the tax cuts that were passed in December 2017 – putting even more pressure on household finances.
Here are some of the companies that have laid off workers in 2018: GM (5,000), Sears (not specified), Verizon Wireless (3,000), Pepsi (1,000), JC Penney (360, in addition to the 5,000 laid off in 2017), Ford (2,000), Amazon (not specified), Macy’s (5,000), AT&T (4,000), Walmart (4,000), Kimberley-Clark (5,000), IBM (20,000 over the last 5 years), Toys-R-Us (33,000). . .
And those are just the ones I could find. I don’t doubt there are many more.
These are not nice facts, but with the US administration having pinned its flag to the mast of a booming economy it’s not surprising that they’ve been hidden away.
So what does all this mean?
A crash is coming. That is inevitable.
Even without the current astronomic debt levels and rising interest rates, economies go in cycles.
The fact that the US is currently in the longest boom economy in its history means that the bust cycle is coming sooner rather than later.
And, when it does, it will be pretty ugly.
For one thing, the Fed rate is still lower than inflation – and, therefore, negative in real terms.
That leaves the Fed with very little room to drop interest rates in order to stimulate the economy when it collapses.
Which means the next crash could be a lot uglier and a lot longer than the 2007/2008 crash.
One of the reasons the Fed is trying to ‘normalise’ interest rates is to give itself some ammunition with which to deal with the coming crash.
The problem is that by ‘normalising’ interest rates many debtors will be pushed into bankruptcy because they won’t be able to service their debt.
And that may be the trigger for the collapse.
Actually, anything (and probably something we’ve not thought of) could be the trigger for the collapse. One small thing can set off a chain reaction, as it did in 2007, and the entire house of cards will collapse.
That could be tariffs, it could be happenings in the Middle East, it could be something to do with North Korea, the South China Sea or any one of scores of other trouble points.
How can you protect yourself?
For private individuals I can only recommend that you find additional sources of income that do not depend on employment.
Do so now, while you are still employed. Don’t wait for the crash.
Get yourself a side hustle. One that you have control over, not one from which you can be fired.
If ever there was a time for planning ahead, this is it.
I also suggest you look for ways, now, of paying down as much of your debt as you possibly can before the crash comes (and before interest rates climb further).
I have been self-employed since 2009 and debt free since 2011. At times it has been tough, absolutely no question.
But I’m really, really, really pleased I’m not relying on an employer for my livelihood right now!
How to find a successful side hustle?
Find something that people will always need.
At the end of the day there’s stuff that people will always need – razor blades and toothbrushes if nothing else.
So find yourself something that people will always need, whatever the economic situation, and see how you can turn that into a small business for you and your family.
Who knows – it might grow into a very nice business!