U.S. Faces Fiscal Challenges Amid Record Public Debt and Rising Consumer Credit Card Debt
Summary:
This article discusses the rising concerns over the U.S. public debt, which is at an historic high of $34 trillion along with a similar high of $1.13 trillion in consumer credit card debt. It cites warnings from banking sector leaders, escalating interest rates impacting housing affordability and the broader economy, and the potential loss of the dollar's international status. The article also mentions the increase in borrowers struggling with credit card, student, and auto loan repayments, and emphasizes on the importance of diversification for retail investors to weather economic uncertainties. It concludes with an urge to reevaluate and redesign fiscal policies promoting sustainable growth and productivity.
Despite encouraging news about retail expenditures and employment rates in the US, the country is struggling to combat a set of deep-rooted problems that have worsened with time. With the historically high public debt of $34 trillion and a corresponding peak of $1.13 trillion in consumer credit card debt, concerns are rising about the sustainability of fiscal protocols and the effects they could have on future economies. The quote attributed to Alexander Hamilton, "a national debt, if it is not excessive, will be to us a national blessing," seems less reassuring given the current scale of indebtedness.
Not long ago, the subject of public debt was principally the concern of conservatives and libertarians. Today, prominent banking sector leaders are urging attention to the issue. Statements from JPMorgan Chase CEO Jamie Dimon about a potential global market "rebellion," Bank of America CEO Brian Moynihan's call for decisive action, Nassim Taleb's (author of “The Black Swan”) "death spiral" forecast, and ex-House Speaker Paul Ryan's characterization of the debt state as "the most predictable crisis we’ve ever had," underscore the vital necessity for a review and possible revision of US fiscal policy.
A Pew Research Center survey reveals that 57% of Americans believe reducing the government debt should be a priority, signaling a societal emphasis on fiscal responsibility. The real-world impacts of this concern, like its effects on housing affordability and the overall economy, frequently go overlooked. The vulnerable condition of the real estate market, worsened by steadily climbing interest rates, illustrates how fiscal policies can directly affect people’s financial well-being.
The US dollar's international convenience yield has been a crucial element in the US's ability to manage its substantial debt without immediate adverse effects. Nonetheless, a paper published by the National Bureau of Economic Research indicates that the loss of the dollar's international status could potentially increase the debt by as much as 30%. This finding serves to accentuate the need for a thorough review of the national fiscal policy.
This conundrum isn't confined to the US; many developed nations are in the same boat. Increasingly, Americans have been relying on their credit cards to cover ordinary expenses without reducing their balance. A recent report from the New York Federal Reserve reveals that total credit card debt rose by $50 billion (or 4.6%) to a record $1.13 trillion from the previous quarter. This is the ninth consecutive annual increase and the highest level since the Fed's records began in 2003.
The report also notes a rise in borrowers struggling with credit card, student loan, and auto loan repayments. For instance, 3.1% of total debt was somewhere in the delinquency process in December, an increase from 3% from the last quarter, but still lower than the pre-pandemic average rate of 4.7%.
Retail investors should diversify their portfolios to guard against uncertainty. However, the method of diversification is essential. For example, investing in S&P 500 is a savvy move unless all your savings are concentrated in it, which could spell disaster if its value takes a dive. Exposure to digital currencies like Bitcoin (BTC) and Ethereum (ETH) is also beneficial. The hash rate, which shows the level of activity on a blockchain, is critical for long-term value generation in the digital assets market.
With high macroeconomic risks looming, both at national and consumer levels, it's essential to scrutinize the fundamentals, differentiating between transitory and permanent effects. Policymakers will face the compelling task of designing fiscal policies promoting sustainable growth and productivity, while avoiding short-term fiscal actions that could lead to future economic liabilities. The ongoing trajectory, unfortunately, resembles the predicament of a borrower trapped in incessant debt, with interest rates exceeding monthly income.
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Christos Makridis, whose views are his own and do not necessarily reflect Cointelegraph's, is a research professor at Arizona State University, adjunct associate professor at the University of Nicosia, and the founder/CEO of Dynamic Banking. He earned his doctorates in economics and management science & engineering at Stanford University. This article is intended for informational purposes only and not to be considered legal or investment advice.
Published At
2/13/2024 8:21:38 PM
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