"Debt. It’s good, it’s bad, there’s too much of it, the government keeps piling on more of it. What’s the deal?
You may have none, you may have too much, but one thing is certain, debt is a major driving force behind the world economy. Both in our personal lives and in the lives of immense corporations struggling to hold on in an ever-changing economy. Make no mistake, debt patterns will continue to shape all of our financial landscapes.
Given this unavoidable fact of life, when we had the chance to sit down with Dr. Lacy Hunt of Hoisington Investment Management to discuss his upcoming appearance at our Irrational Economic Summit in October, debt is where we began.
U.S. consumers have racked up almost $1 trillion in credit card debt, despite some saying this is a great sign, that this means consumers are optimistic and will buoy the economy, Dr. Hunt does not agree.
He immediately points out that debt is a two-edged sword and that if additional indebtedness doesn’t work to create income to pay down interest and principle, it is a no-win deal.
See, when you agree to spend borrowed money today, you’re leveraging that against your future income. That means that the dollars you’ll earn tomorrow are already spent and will not be there to use in the future for anything else. Seems obvious, right?
Of course, this is not a problem if you expect your income to increase as time marches along and your payments become due. But how many people in America are facing an increase in personal income when the standard of living hasn’t changed one iota in 20 years? Not many.
Unfortunately, this is not on the forefront of most people’s thoughts when they go to buy something like a new car. Dr. Hunt points out that new car sales are buoying portions of the economy, but that credit-lending standards have slipped, much like they did for mortgages prior to the housing crisis in 2008 (Harry has been talking about the auto sector soon getting turned on its head for months!).
To illustrate this, Dr. Hunt points out that the average automobile loan has gone from six years to eight in order to allow less qualified buyers to purchase more expensive cars than they might otherwise have been able to afford.
This allows buyers to make smaller payments over a longer term, but also exposes them to the risk of missing any one of those 96 monthly payments.
But what about student debt? That has always been one way to invest in ourselves, and our children, and foster new revenue streams to pay down interest and principal. Dr. Hunt has bad news on that front, as well.
From Dr. Hunt’s interview with Rodney Johnson:
Unfortunately, the economy is performing so poorly that a lot of our college graduates are coming out and they’re having to settle for jobs that are not much better than what they would’ve received if they had gone directly into the labor force from high school.
Even classically “good debt” like a college education has become a non-performing investment. That’s scary because Dr. Hunt also points out that this deluge of debt, and our eagerness both as a country and as consumers to incur the “wrong type of debt” is killing growth.
This debt is slowing GDP growth and the growth of our personal incomes and investments. “That’s why”, Dr. Hunt points out, “the standard of living is unchanged from where it was 20 years ago....”
Robert Johnson
Editorial Director, Dent Research
Ref: http://economyandmarkets.com/economy/debt/dr-lacy-hunt-debt-irrational-economics/ (Forget! advertising.)
