by Dick Lepre
View these articles and more at
“What Happens in Emerging Markets
Doesn’t Stay There,”
“Stay Informed and Ignore the Buzz on Rates,”
“The Bond Market as Crystal Ball,”
“Read the Construction Tea Leaves,”
6. 6 percent of all federal government spending in 2017
and that’s expected to jump to 13 percent in a decade,
The New York Times reported.
In 2009, with interest rates low, Treasury decided to
lengthen the average duration of its debt. In November
2017, however, Treasury ended that policy. The result is
lower total interest rates in the short run, with rate risk
increased in the long run.
Professionals in the mortgage business are familiar with debt ratios. A similar metric for Treasury
debt is the ratio of national debt to GDP — the latter a
measure of gross economic activity. The higher the
ratio is, the more difficult it is to service. The Federal
Reserve produces a graph of the ratio of total federal
(or national) debt to GDP. It shows that the ratio rose
from 62 percent in third-quarter 2007 to over 105 percent in fourth-quarter 2016, but has been relatively
flat since 2015.
Medicare and Social Security
In addition to the national debt, the federal government has liabilities associated with Social Security and
Medicare. The 2018 report from the Trustees of these
funds estimates that while they hold substantial reserves at present, those reserves will soon be depleted.
If not addressed, the Social Security Trust fund will run
out of reserves in 2034 and the Medicare’s hospital
insurance fund’s reserves will be depleted in 2026.
The trust-fund underfunding is not technically debt,
but it does, nonetheless, represent obligations. The
present value of the underfunding of Social Security
over a 75-year window is $13.2 trillion. The present
value of the unfunded liability of Medicare is $37 trillion
over the same time frame.
One of two things is going to happen: Either politicians will address this or, at some point in the future,
our capacity to borrow will not be enough to sustain
the regular budget plus the entitlement spending
of Social Security and Medicare. We are running our
nation’s finances with zero regard for future generations. Part of the problem is that there is no accountability. While everyone loves to blame things on
politicians, the fact is that, unless voters demand fiscal
sustainability, it will not happen until a debt-induced
fiscal disaster occurs.
Local government debt
Liabilities from debt and the underfunding of pensions
of public employees will likely cause some large U.S.
cities to file bankruptcy in the future. Some cities can
solve the problem by raising taxes, decreasing benefits or increasing employee contributions, or a combination of those.
For some cities, however, there is no easy solution.
Public debt can cause local government to increase
taxes, drive people out and make the problem worse.
Politicians often have too little inclination toward fiscal
There is no provision in the bankruptcy code for a
state to file bankruptcy. The public pensions of New
Jersey, for example, have only 31 percent of the assets
needed to make pension payments. Illinois has 36 percent. State and local pension underfunding are the
result of unrealistic policies. In brief, not enough
money is being put into the pension funds to cover the
The corporate debt load has reached a record $6.3
trillion, rising by $2.7 trillion over the past five years.
Too much corporate debt has been used for stock
buybacks, which produced higher equity prices but
almost zero economic growth. Borrowing for capital
expenditures was concentrated in the oil industry, and
that debt could turn bad if oil prices fall.
Debt taken on by a corporation to buy back stock
might make sense if the company has a revenue
stream to pay down the debt incurred. General
Electric, for example, spent $40 billion on stock buybacks between 2015 through 2017. Stock buybacks
generally drive up share prices, perhaps rewarding executives whose income is based on share price.
This is bad corporate governance, however, and may
be the next chapter in the “corporations are evil”
<< Debt continued from Page 108 “Too much debt has some major ill
effects on the mortgage business.”
Too much corporate debt today is low quality, much
of it in what are called “leveraged loans.” Professionals
in the mortgage industry would call these subprime
loans. These loans were made in search of higher yields
when the federal funds rate was near zero. Should the
economy sour, these leveraged loans have the potential to spark another banking-liquidity crisis.
Personal debt can be either productive or unproductive. A home loan, buying a car on credit so that one
can get to work and student loans that enable higher
incomes are examples of productive debt. Mortgage
debt also usually makes sense because the alternatives
are renting, living with friends or relatives, or homelessness. These are investments in one’s future.
There are mainly four types of personal debt:
Mortgage debt ($9.0 trillion outstanding nationwide),
student-loan debt ($1.5 trillion outstanding), auto
loans ($1.24 trillion outstanding) and credit card debt
(in excess of $830 billion outstanding).
Buying consumer goods on credit to supplement
the difference between one’s income and lifestyle
expense is bad debt. Having credit extended by a
bookmaker is bad debt. Using your credit card to gamble is bad debt.
Student-loan debt is a special case. The amount of
debt is large. It is owned by the federal government,
which has to borrow money to make the loans. It
makes homeownership difficult.
According to the National Association of Realtors,
student-loan debt delays homeownership by seven
years for millennials, the younger generation that is
now the largest source of first-time homebuyers. It
also delays marriage, having kids and auto purchasing.
If debt causes people to have fewer children, the problem is compounded because in the future there will
be fewer people to pay off the debt.
Too much debt has some major ill effects on the mortgage business. People who are too heavily indebted
may never be able to buy a home. Students with too
much debt will, at minimum, delay buying homes.
If the total amount of borrowing gets excessive,
compared to total savings, it can create higher rates
for all lending. That outcome would not bode well for
the mortgage business long term. n