Brian Westbury is a well-respected economist at First Trust, and he recently published an article on two big concerns weighing on the minds of investors in regards to debt accumulation since the end of the financial crisis:
- Most of the economic growth since the crisis has been fueled by borrowing. Consumer credit is up nearly $1.1 trillion since mid-2010 (the largest increase in such a period), which simply cannot be explained as anything other than a “credit binge.”
- Student loans are the next “bubble,” as the amount of debt has exploded by 274% since mid-2010 and accounts for two-thirds of the $1.1 trillion. Consumers will never pay these loans off, let alone afford to buy a house, car, or any other goods on credit.
He believes that these fears are overblown, and I tend to agree with him. To understand why, let’s dig into some of the data he uses to support his conclusions.
According to his research, total personal income is up $3.2 trillion over the same time period, which is way more than the growth in credit. This is VERY important. Why?
I have written extensively about why the U.S. government debt situation is not and will not be a problem for several decades. One of the key components to my argument is that it’s not the amount of debt that matters but rather if one can afford the debt.
Here’s an analogy to simplify the situation. If two neighbors have the same $1 million mortgage, but one makes $500,000 a year and the other $50,000, then the neighbor with the higher income should be far better off.
Mr. Westbury uses the exact same logic for consumers. Currently, consumers’ monthly mortgage, rent, car, and credit card payments have been hovering at the lowest share of income since the early 1980s. This phenomenon is a result of (1) incomes growing faster than debt and (2) low interest rates. Simply put, most consumers can afford their debts.
In regards to fears that these debts will somehow drive the U.S. economy into a recession, here’s an excellent quote directly from the article:
“If the US does have a recession, credit stress will increase, it always does. But that recession will not be caused by the overall debt burden itself.”
Let me be clear. I do not condone the use of excessive debt. I don’t want the government to spend like drunken sailors, and I certainly don’t think that an 18-year old with zero credit history should be given $200k to study something that could almost never generate a return on investment. However, these concerns on their own cannot cause an $18 trillion economy to fall apart.
The bottom line is that student debt is a problem, but it isn’t one that will deliver another 2008-style downturn. If you don’t believe me, just take Mr. Westbury’s word for it:
“So, it’s not the debt that is a problem, it’s what the debt is paying for. Student loans won’t bring down the economy. But they have created a bubble in education. Outside of this, the consumer and economy are doing just fine.”
Click here to read the full article.