Gary Shilling
The financial crisis 10 years ago exposed excessive borrowing by U.S. homeowners and the financial sector, which led to a massive deleveraging effort. Now, debt is back on the rise, this time led by government. The total debt of all U.S. sectors is 3.5 times gross domestic product, closing in on the peak of 3.8 times in April 2009 and more than twice the 1.5 times ratio of the 1960s and 1970s.
But don't get too concerned. With inflation likely to remain low and Treasuries continuing to be a haven for domestic and foreign investors, financing the expanding federal debt should continue without major problems. Indeed, with worries about faltering stocks, an aged business expansion and growing global protectionism, recent signs of the strength in Treasuries will probably persist.
Those aren't the only reasons to be sanguine. Rising U.S. debt is predominantly a federal affair. Households and the financial sector continue to delever and other private sectors are holding steady. Consumer debt is down from its late 2007 peak of 133% in relation to disposable (after-tax) personal income, but remains elevated at 104%. Although that's far above the 65% norm of the 1960s and 1970s, before the start of the decades-long borrowing binge in the early 1980s, further substantial declines are in the offing. A key reason is the aging postwar babies. As people get older, they pay down home mortgages and otherwise spend and borrow less. Also, the profligate postwar babies have insufficient assets for retirement and need to save vigorously and retire debt or work until they die. Consumer borrowing will also be discouraged by rising debt service costs that come as the Federal Reserve lifts interest rates.
Financial sector debt in relation to GDP has also declined considerably, according to Fed data, due to government regulations, especially the 2010 Dodd-Frank law. Combining that with the chastisement of big bank CEOs, the odds of another 2008-like financial crisis are low. Instead, if history is any guide, the next trauma will appear elsewhere just as the savings-and-loan crisis of the late 1980s was not repeated but was followed by the dot-com stock bubble collapse of the early 2000s. Then came the rise and fall of subprime mortgages.
