When the economy shut down in March, the U.S. economy was toting $64 trillion in government, business, and consumer debt – more than three times the national GDP.
Economies with high debt tend to recover more slowly from a setback than economies with less borrowing.
In the U.S., up to 70 percent of the economy is made up of consumer spending. When household debt is high, as it is and has been for years in the U.S., households have less to spend when it comes time to spur economic growth.
Partly because of consumer debt, after the Great Recession, real median income didn’t return to its 1999 peak of $61,526 until 2016.
In the months before the economic shutdown, the percentage of delinquent auto loans was approaching its peak level in the Great Recession.
Similarly, corporate debt climbed steadily in the months before the shutdown, leaving them with the decision now either to hire and invest in production or keep payrolls thin and use the money instead to meet their debt payments.
Overleveraged companies swelled the amount of “non-investment grade debt,” otherwise known as junk bonds, to more than double since 2010. Artificially low interest rates and, now, central bank intervention have kept many of those companies from going bust.
Meanwhile, state and local governments have been squeezed between tax-averse voters and rising costs. Many public agencies have not set aside enough money to cover their pension liabilities, risking default and transferring those liabilities to federal guarantee programs.
With the pandemic pushing governments past the financial brink, many of those agencies already have laid off workers and cut services.
TRENDPOST: Since peaking in February, state and local governments have shed over 1.2 million jobs. And, the U.S. Labor Department reported 216,000 government jobs have been lost in September.
As the “Greatest Depression” worsens and sales go down, business go bust, people go broke, real estate dives… tax revenues will sharply fall, pushing cities and villages deeper in debt. Thus, more government jobs will be lost.
On the broader scale, as we continue to note, there is a complete disconnect between Wall Street and Main Street.
Equities should be tanking in tune with the economic meltdown spreading across the globe. Instead, they continue to be artificially propped up by central banks and governments’ injections of monetary methadone to keep the money junkies high.
