America’s Debts: Those Who “Came of Age in the 1960s and Early 1970s” are Still In Charge

Federal Reserve Z1 data on total U.S. debt for 2017 was released in March, and it appears that while it took eight years, the Obama Administration finally had an economic year it could be proud of.   A year when inflation-adjusted GDP increased moderately, in this case by 2.3%, but the increase was not driven primarily by rising debts, with Americans continuing to sell off its future to consume today. Total U.S. non-financial debt actually fell by 0.5% of GDP, from 253.5% of GDP in 2016 to 253.0% of GDP in 2017. Federal government debt fell from 86.0% of GDP to 84.9% of GDP, the first decrease of the Obama Administration. Household debt edged down from 78.8% of GDP to 78.7% of GDP. These improvements took place, aside from 20 days, after President Obama had left office, but while the policies he had hashed out with Congress mostly remained in effect.

By the end of 2017, however, the new President and “King of Debt” Donald Trump finally began to get some of his agenda through. His huge, deficit-increasing tax cut was signed on December 22, and will take effect in 2018.   A huge deficit increasing spending bill followed this March. And he has been moving to get rid of government restrictions intended to prevent the financial sector from lending people more money than they could pay back, and from speculating on derivative bets while having taxpayers bailout their losses. Last year I wrote that Generation Greed was planning one more economic and fiscal orgy at the expense of its children and grandchildren, and at the expense of the future of the United States. This year, in light of the Harvey Weinstein brouhaha, the term “orgy” seems too consensual.   The last economic and fiscal gang rape is probably more like it.

To be fair to President Trump, soaring federal debt doesn’t have to mean total U.S. debt soars as well.   After all, nothing pushes up debt as a percent of GDP more than a deep recession, which reduces GDP and causes federal tax revenues to plunge and social service costs to soar. Total non-financial debt soared 229.9% of GDP in 2007 to 249.3% of GDP in 2009, and federal government debt soared from 42.0% of GDP to 61.6% of GDP in the last two Bush budgets.

Following the Trump tax cuts, it is possible that households and businesses could use the additional money floating around as the federal government goes broke to reduce their own debts, and to buy up all those extra U.S. Treasury bills and bonds. Remember “we owe it all to ourselves?”   But that’s not the way to bet.

It has been reported that foreign investors now own more than half of all U.S. Treasury instruments not on the books of the government itself. If interest rates were to rise from around zero to a more normal average of say, 4.0%, then the federal government would have to pay a huge amount of its tax revenues out of the country every month, perhaps as much as 2.0% of GDP after The Donald gets the total federal debt up to 100.0% of GDP.   And if interest rates don’t rise to a more normal 4.0% for U.S. Treasury instruments, then the expected returns on U.S. pension funds, at 7.0% for New York City and that high or higher elsewhere, can’t possibly be met.   Younger generations are screwed either way.

But let’s look at the numbers, which are in this spreadsheet.

Total Credit Market Debt Outstanding z1-2017

Total Debt

Total U.S. debts fell from 337.2% of GDP in 2016 to 335.4% of GDP in 2017. The peak had been 364.1% of GDP in 2009, but it has been falling since due to financial sector deleveraging. Total U.S. debts had been below 170.0% of GDP before 1980, a time of far less inequality, but have since doubled.   As I wrote previously…

Rising debts create more inequality – and more money piled up by those at the top – by allowing businesses to pay workers less and yet still sell them more. And rising debts allow imports in excess of exports.   That is what has happened for nearly 40 years, with the U.S. and most of its people going broke as a result.

Financial debts fell from 122.3% of GDP in 2008 to 82.4% of GDP in 2017, about back where they had been in 1999, but far above the less than 20.0% of GDP that prevailed before 1980. The reduction in “heads I win, tails the general public loses lose” leverage is something the King of Debt wants to reverse.

Conservatives who are working to undo Obama-era Wall Street reforms do have one regulation they’d like to keep in place: high capital requirements for financial institutions, so that big banks can pay for their own losses if they run into trouble instead of needing a government bailout. The House Republicans’ Financial CHOICE Act follows this model, gutting scores of rules created by the 2010 Dodd-Frank law in favor of a simple capital buffer….

But Randal Quarles, the most important regulatory official at the Federal Reserve, announced last week that reducing capital requirements is a top priority—and Fed Chair nominee Jerome Powell supports the idea. So Donald Trump’s two biggest appointments to the central bank not only agree on dismantling the relatively more stringent regulatory apparatus in place since the Great Recession, but are taking the one policy conservatives have long supported in financial regulation and targeting it for degradation.

Joseph Otting, a former banker who took over as head of the Office of the Comptroller of the Currency last year following his nomination by President Trump, said yesterday that leveraged finance bankers shouldn’t consider themselves bound by the lending guidelines the agency issued in the wake of the financial crisis.

The guidelines, introduced in 2013 to curb excessive risk-taking, capped leverage at 6x – subject to certain conditions – and contributed to less aggressive dealmaking among regulated banks, and an uptick in more aggressive deals from non-regulated institutions such as Jefferies and Nomura.

However, in October, the Government Accountability Office designated the guidelines as a formal rule, thus opening them up for congressional review. Since then, regulators have also said they are open to reviewing the guidelines, prompting several bankers to say they have already begun pushing their credit risk officers to allow more aggressive deals.

Non-Fin Debt

Excluding the debts financial companies owe each other, total U.S. debts never really fell.   Soaring from 139.5% of GDP in 1981, during the last budget of the administration of President Jimmy Carter, total debts soared to 185.3% of GDP in 1989, during the last budget of President Ronald Reagan. Federal deficits due to Reagan’s huge tax cuts, and high spending on everything other than the poor and infrastructure, were the main reason.

From that point total non-financial debt barely grew, to 189.6% of GDP in 2001, the last budget of President Bill Clinton.   The large reduction in federal debt during Clinton’s administration was made possible by a huge increase in private debt, the only reason the economy continued to grow.

Total debts then soared to 249.3% of GDP in 2009 in the administration of President George W. Bush. Both federal borrowing and household borrowing played a role in that national party.   With so much money going toward interest on debts from past spending, leaving so little for current and future spending, the U.S. and the rest of the world faced a global crisis of demand.

All the economic pain and stagnation of the Obama Administration were the result not of paying off all those debts, but merely not having them rise as fast. Total U.S. non-financial debts peaked at 253.5% in 2016, and then fell slightly for just one year.

Debt By Type

Some people’s debts are other people’s paper assets.   At one time people borrowed money to invest – in homes that were more affordable than renting, in plant and equipment and infrastructure and research and development that would produce income to pay the debts off.   But much of the debt run-up since 1981 has been used to pay for consumption. It is backed by nothing other than a promise to live poorer in the future to offset having lived richly in the past.

Much of that debt, which is to say much of the assets that had been piled up by the rich and the financial sector, would have disappeared in a bonfire of bankruptcy, as in the 1930s, if the federal government had not stepped in to save the better off.   The 1920s had also featured soaring debt and soaring inequality, but after all that debt and all that paper wealth was wiped off the books in the Great Depression, the 1930s saw far more equality than the country has seen since.

To prevent another Great Depression, and prevent total non-financial debt from plunging, federal debt increased from 42.0% of GDP in 2007 to 61.6% of GDP in the last Bush budget to 86.0% of GDP in 2016, before falling back. It remains at more than double the 2007 level.

That money didn’t go to protect the less well off. Foreclosures soared, and life expectancy fell for those born after 1957 or so. Only households headed by those over age 65 in 2016 were better off than those at a similar phase of life had been in 2006.   And yet it is today’s seniors who are being promised their old age benefits won’t be reduced to pay off all that debt. Only poorer younger generations will be left to bear that burden.

Soaring federal debt has left the U.S. dependent on other countries to stay afloat, and those other countries are beginning to use their power over the U.S. to dictate terms.

In April, Saudi Arabia warned it would start selling as much as $750 billion in Treasuries and other assets if Congress passes a bill allowing the kingdom to be held liable in U.S. courts for the Sept. 11 terrorist attacks, according to the New York Times.

Saudi Arabia’s Finance Ministry declined to comment on the potential selling of Treasuries in response. The Saudi Arabian Monetary Agency didn’t immediately answer requests for details on the total size of its U.S. government debt holdings.

“Let’s not assume they’re bluffing” about threatening to retaliate, said Marc Chandler, the global head of currency strategy at Brown Brothers Harriman. “The Saudis are under a lot of pressure. I’d say that we don’t do ourselves justice if we underestimate our liabilities” to big holders.

China’s ambassador to the U.S. wouldn’t rule out the possibility of the Asian nation scaling back purchases of Treasuries in response to tariffs imposed by President Donald Trump….China is America’s biggest foreign creditor. It held $1.17 trillion in Treasuries as of January, or about 19 percent of all foreign holdings of U.S. government securities.

The U.S. can ill-afford to see weaker demand for its debt from its major buyers. With budget deficits rising in coming years and tax cuts approved in December expected to hurt revenue, the Treasury has to sell more securities to pay the government’s expenses. The Federal Reserve is already scaling back purchases of Treasuries as it gradually reduces its $4.4 trillion balance sheet.

This is the future older generations have left to their children and grandchildren, after having themselves inherited a country that was the world’s biggest creditor and the most powerful country on the planet. And after just one year of falling federal debt older generations, having installed President Trump in office, are seeking to sell off whatever future the U.S. has left before they are gone.

The debt of non-financial businesses, as a group, had been below 55.0% in 1981, before the Generation Greed era began. It soared to 72.6% of GDP in 2009. And after falling to 66.1% of GDP in 2011, it increased again to a record 73.6% of GDP in 2017.

Amid growing profits, the recession that began in 2007 seems an increasingly distant memory. Yet the situation has a dark side: companies have binged on debt.

When calculated as a percentage of GDP, the total debt of America’s non-financial corporations reached 73.3% in the second quarter of 2017 (the latest available data). This is a record high. Measured against earnings before interest, tax, depreciation and amortisation (EBITDA), the net debt of non-financial companies in the S&P500 hit a ratio of 1.5 at of the end of 2016, a level not seen since 2003. And it remained nearly as high in 2017.

Certain industries look particularly vulnerable under their debt loads. David Tesher of S&P Global Ratings says that retail is the sector in America most at risk. Such companies accumulated high levels of debt after more than a decade of private-equity-sponsored activity. They must also cope with tough competition from e-commerce.

Around 50 American retailers filed for bankruptcy in 2017 alone, many due to the debt piled on by their private-equity owners. The most prominent example is Toys R Us, which was acquired by a consortium of private-equity firms in 2005.

The founder of Toys “R” Us, who had retired in 1994, died a few days after the company went into liquidation, living long enough to see his legacy cashed out by his successors. And cash out is the right word, because insiders tend to take their money out up front in these asset-stripping deals.

IHeartMedia Inc. has gone bust, but that doesn’t mean the two private equity firms that bought the broadcaster during the past decade’s mega-buyout spree got wiped out.

They’ll almost break even, because of iHeart debt they bought at deep discounts and millions of dollars in management fees, according to people familiar with the matter. And the two firms, Bain Capital and Thomas H. Lee Partners, might gain even more from parts of the company that they’ll get to keep after it filed for Chapter 11 protection on Wednesday.

IHeart was one of 19 companies that buyout firms including Bain and Lee acquired for more than $10 billion each during a takeover frenzy fueled by cheap debt from 2005 to 2008. The outcome of these deals has been mixed.

Business debt has risen to increase executive pay, through stock buybacks offset by stock grants and options for the executives, and to finance mergers, to increase economic and political power and reduce competition in the marketplace. Not to invest in new plant, equipment, and research and development.   It’s asset stripping on an economy wide scale, as existing assets depreciate faster than new ones are created.

However much one admires master investor Warren Buffett, his influence may have a dark side. The beating heart of Buffettism, celebrated in a thousand investment books, is to avoid competition and minimize capital investment in the real economy.

A torrent of recent studies show how exactly those forces – diminished competition, rising profits and lower investment – afflict the U.S. Economists Jan de Loecker and Jan Eeckhout chart a rise in corporate mark-ups, a measure linked to profit margins, from 18.0% in 1980 to 67.0% today. In a paper presented at the Brookings Institution last week, Germán Gutiérrez and Thomas Philippon show how investment has fallen relative to profitability.

Mr. Buffett did not cause these trends. However, they are central to his fortune. When you celebrate him, you celebrate them.

State and local government credit market debt, on the other hand, has fallen from a peak of 21.6% in 2009 to 15.9% of GDP in 2017, the lowest since before the debt binge of the mid-2000s. But this measure only includes debt in the form of bonds.

While on the books debts have fallen somewhat, off the books hidden debts have soared. Hidden debts in the form of infrastructure and public buildings that are left to deteriorate.   And hidden debts in public employee retirement benefits that were not funded.

When citizens think about where local taxpayer money goes, they often assume it pays for things like public safety, snow removal and trash collection — routine operating expenses that come with running any big city. And that’s mostly true. But what they rarely realize is that legacy costs also eat up large portions of the typical city’s budget. Debt accumulated over many years, contributions to employee retirement systems and the expense of fixing long-neglected infrastructure all take a significant toll.

Merritt Research Services provided Governing with data on current debt service, pension costs and other post-employment benefit (OPEB) expenses for cities with populations exceeding 500,000. These three cost drivers collectively averaged nearly a quarter of total governmental fund expenditures in recent years. What’s worrisome is that legacy costs are rising, taking up ever-larger shares of budgets. For the large cities reviewed, the three line items accounted for a median of 22.4% of fiscal 2016 governmental fund spending, up from 19.8%.

As legacy costs continue to rise, cities have less money for public safety, health care and other essential services.

Going forward, the scenario for many cities appears to be less debt, but more pension and OPEB costs. “There has been a noticeable reduction in the amount of debt that’s out there,” Cohen says, “but the pension and OPEB pressures are likely to continue to trend upward.”

Even though state and local governments are putting more into pension funds than they were before 2008, they are still not putting in enough. Instead they are hiding how deep in the hole those funds are, by assuming high future returns on their investments, from already inflated asset values.

When the stockmarket is close to a record high, the chances are that recent returns will have been very strong. The terrible tendency among investors is to assume that those returns will continue. But the higher you go, the harder it is to keep rising at the same pace.

When I visited America for a story on pensions last autumn, I was struck by how few people failed to grasp this point. Public pensions have return targets of 7-8% for their portfolios. When challenged they tend to cite their 30-year record of achieving those numbers. But that record makes it less likely, not more that they will hit their targets.

The easiest way to think of this is via the bond market. In 1987 the yield on the ten-year Treasury bond was just under 9%. Since then it has fallen to its current level of just under 3%. So not only did bond investors get a high yield in their early years, they received capital gains as bond yields fell. Future returns are obviously limited by the low initial yield, but also by the small likelihood of future capital gains.

I had recommended that incoming Governor Phil Murphy of New Jersey fess up to how deep in the hole that state has been left in the wake of Generation Greed.

But like the Republicans at the national level, Democrats (and Republicans) at the state and local level can’t resist cashing out what little future younger generations have left.

Gov. Phil Murphy’s administration is rolling back a change to New Jersey’s public worker pension system that Chris Christie slipped in during the waning days of his administration that raised government contributions by more than $800 million.

Murphy’s acting state treasurer, Elizabeth Muoio, said Christie’s surprise reduction in the pension system’s assumed rate of return from 7.65% to 7.0% placed a ‘undo stress’ on the governments that would have to find the extra cash…

Instead, Muoio said she will set the rate at 7.5 percent for the fiscal year beginning in July, otherwise known as fiscal year 2019, and fiscal year 2020.

 The debts of household and non-profit organizations had totaled less than 50.0% of GDP until 1984. Back then the main way for businesses to sell Americans more was to pay them more, so they would have the money to buy things. But in the 1970s and 1980s employee wages began to fall, with the financial sector lending people more and more money to make up the difference. This peaked in the 2000s, as people refinanced their houses or took home equity loans to cash in the value of their houses and spend it.

Household and non-profit debt peaked at 97.9% of GDP in 2017, and then fell 78.5% of GDP in 2015 before leveling off.

Consumer Debt1

Total household debt fell, however, only because of a surge of foreclosures, with millions of Americans defaulting on their mortgages and being kicked out of houses. This went on for years, as the federal government strung out the re-sale of those houses to keep prices high for younger buyers. Even pushing them to spend 50.0% of their incomes on debts, to benefit older sellers and those who held their mortgages.

Consumer Debt2

Excluding mortgage debt, other household debts have been rising since 2011, from 23.3% of GDP that year to 26.6% of GDP in 2017.   The current level of non-mortgage household debt is a record high – the figure was below 20.0% from 1952 to 1985. While student loans and credit cards have been most in the news, Americans are going into hock and impoverishing themselves across the board.

A boom in sales, a pickup in defaults, and risk premiums keep on dropping. It’s all happening in the market for subprime auto bonds, where loans to American consumers with some of the patchiest credit histories are packaged into securities to be sold to big investors.

A decade after risky mortgage lending toppled the U.S. financial system, the securities have rarely been so popular. But the collateral behind the bonds is getting less safe: car-owners are increasingly falling behind on bigger loans with longer repayment terms made against depreciating assets.

Americans are increasingly turning to personal loans — loans with short terms of just 1-5 years, in small amounts from $1000 up to about $50,000 — to smooth over their financial woes.

Data from Transunion shows that there were a record number of personal loans in 2017: 17.5 million in the third quarter — the latest data available — up from just 12.5 million at the same time in 2014. Their balances are creeping up, too. Transunion estimates that by the fourth quarter of 2018, the average debt per personal loan borrower will hit $8,461, up from an estimated roughly $8,000 at the end of this year and about $5,900 in 2011 and 2012. And as more players enter the field, Transunion predicts “even more growth in balances and volume of loans.”

People take out personal loans for a variety of reasons — everything from debt consolidation (the top reason) to buying a trip to stocking their closet for the season. Sometimes those reasons make sense, but other times they don’t.

The most common reason people take out personal loans is for debt consolidation”– and more people are likely to do this because our credit card debt has hit records, says Robin Saks Frankel, a financial products writer and reviewer for Indeed, the Federal Reserve announced in January that revolving credit, most of which is credit card debt, as of November, had hit a record high (more than $1 trillion).

The flip side of high debts is low savings.   People save for big long term goals, such as starting a business, their children’s education, or retirement. They also save by paying off the mortgage on their houses, allowing them to live rent- and payment-free when they retire and their income drops. Or at least they once saved for those reasons.

The latest data on the saving rate, which broke under 3.0% to 2.9% in November, the lowest since 2007, suggest that an encore to the ebullient buying over the holidays will not happen in the new year.

Credit cards are merely the next step along households’ path to living beyond their means. The decline in the saving rate is the mirror image of consumer credit outstanding as it’s ballooned in recent years. As has been heavily reported, student loans have been responsible for the bulk of the buildup, followed by car loans.

Over the last two years, however, credit card growth has acted as an accelerant, outpacing income growth at an increasing pace. By its very nature, credit card debt gets more expensive to carry with every rate hike the Federal Reserve pushes through.

Since the 1980s Americans have borrowed more and saved less. One consequence is the explosion of student loan debt.   A second is a reduction in new business openings. The third is future retirements into poverty. All this means less money to spend in the future as a result of more spent in the past.

What happens when retirement is reached without pensions, without adequate savings, and perhaps without federal old age benefits after The Donald finished bankrupting the federal government?   For the generations to follow Generation Greed, the circumstances for most – for those who are not rich and who did what everyone else did – will be bleak.

The U.S. retirement age is rising, as the government pushes it higher and workers stay in careers longer. But lifespans aren’t necessarily extending to offer equal time on the beach. Data released last week suggest Americans’ health is declining and millions of middle-age workers face the prospect of shorter, and less active, retirements than their parents enjoyed.

Here are the stats: The U.S. age-adjusted mortality rate—a measure of the number of deaths per year—rose 1.2 percent from 2014 to 2015, according to the Society of Actuaries. That’s the first year-over-year increase since 2005, and only the second rise greater than 1 percent since 1980.

At the same time that Americans’ life expectancy is stalling, public policy and career tracks mean millions of U.S. workers are waiting longer to call it quits. The age at which people can claim their full Social Security benefits is gradually moving up, from 65 for those retiring in 2002 to 67 in 2027.

Almost one in three Americans age 65 to 69 is still working, along with almost one in five in their early 70s.

In her powerful new book, “Nomadland,” award-winning journalist Jessica Bruder reveals the dark, depressing and sometimes physically painful life of a tribe of men and women in their 50s and 60s who are — as the subtitle says — “surviving America in the twenty-first century.” Not quite homeless, they are “houseless,” living in secondhand RVs, trailers and vans and driving from one location to another to pick up seasonal low-wage jobs, if they can get them, with little or no benefits.

The “workamper” jobs range from helping harvest sugar beets to flipping burgers at baseball spring training games to Amazon’s “CamperForce,” seasonal employees who can walk the equivalent of 15 miles a day during Christmas season pulling items off warehouse shelves and then returning to frigid campgrounds at night. Living on less than $1,000 a month, in certain cases, some have no hot showers.

As Bruder writes, these are “people who never imagined being nomads.” Many saw their savings wiped out during the Great Recession or were foreclosure victims and, writes Bruder, “felt they’d spent too long losing a rigged game.” Some were laid off from high-paying professional jobs. Few have chosen this life. Few think they can find a way out of it. They’re downwardly mobile older Americans in mobile homes.

And their children, who are inheriting many of their collective debts, are poorer.

The income boom enjoyed by people born between 1966 and 1980 has turned to “bust” for the generation that followed them, according to a report published Monday.   In an analysis of eight high-income countries, the Resolution Foundation think tank found that millennials in their early 30s have household incomes 4 percent lower on average than members of so-called Generation X at the same age.

These are the people on the wrong end of the generational gang rape. There seems to be no one speaking for them, and no one who cares about them – or at least no one who cares about what their life will be 20 years from now. The Kings of Debt prefer to live for today, and try not to think about it. After all, they have an excuse for their self-serving behavior. It was the times they were raised in.

Harvey Weinstein has issued an official statement in reaction to an article published by The New York Times on Thursday in which a handful of former employees and associates accused the media mogul of sexual abuse that spans decades. Weinstein told the NYT that he will be taking a leave of absence from The Weinstein Company in order to attend therapy, and he released an official statement to the newspaper that is downright bizarre.

“I came of age in the 60’s and 70’s, when all the rules about behavior and workplaces were different. That was the culture then.”

Those who “came of age in the 1960s and 1970s” are still in charge. And they haven’t learned a thing, other than how much they can get away with without being called out on it.

We had economic growth that wasn’t a phony expansion created by selling off this country’s future for one lousy year.


2 thoughts on “America’s Debts: Those Who “Came of Age in the 1960s and Early 1970s” are Still In Charge

    1. larrylittlefield Post author

      So the problem is distribution, in her view. But in my view, the problem with distribution is caused by debt.

      If people didn’t go into hock for short term consumption, individually and collectively, then they could have only been sold what they were paid. By levering up the financial sector is basically handing money over to the richest, with some steps in between, but setting the stage for a deleveraging collapse. Bad as it might have been — and I understand that in the 1930s we got FDR not Hitler or Stalin — I wonder if most Americans would have been better off today if that collapse had run its course in 2008. Besides, we ended up with Trump, and who knows what else next.

      And the waste is appalling. An Economist article notes that Americans are not the happiest people. But virtually everyone in the United States (except those camper Nomads) gets to take a hot shower every single day. But how many are made happy by this? Frivolities have been social engineered into wants and then needs, and then some of these are taken away.

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