If the US government and its citizens paid off all of their debts or if borrowing were forbidden, would the country’s economy collapse? Given how much debt the public and private sectors have accumulated since the coronavirus outbreak, the issue seems reasonable. Prior to the COVID-19 public health catastrophe, red ink has already spread throughout the US landscape, but in recent years, IOUs have saturated the nation. A few recent data points demonstrate how the American economy is being consumed by debt.
The Walking Debt
The federal government has already reported the third-largest budget deficit in American history and the highest ever outside of the epidemic years with a few months left in fiscal year 2023. Washington reported a deficit of $221 billion in July, raising the total to $1.613 trillion and maintaining the rolling 12-month deficit at or above $2 trillion. The budget imbalance for the entire previous year was $1.375 trillion.
Tax revenues increased by over 3% to $276 billion last month, while government spending increased by almost 3% to $497 billion. Revenues fell 10% to $3.7 trillion in the first ten months of 2023, while spending increased 10% to $5.3 trillion. The Congressional Budget Office (CBO) claims that the lower-than-expected receipts are mostly attributable to the individual and corporate income tax collections. The increase in spending on Social Security, Medicare, Medicaid, and interest is the reason behind the double-digit growth in spending.
The cost of servicing America’s debt is rising as interest rates rise. Interest has reached $725 billion so far this fiscal year and is on track to surpass $1 trillion for the first time. The national defense, Medicare, education, veterans’ benefits, and transportation are currently outspent by interest spending. According to the CBO and White House forecasts, over the next ten years, this will become the new norm.
Not because of the former president Donald Trump, Fitch Ratings degraded the US government for this reason. The agency made it clear that Washington’s haircut was primarily due to “expected fiscal deterioration” during the following three years. Do not, however, mention this to the current administration because, as they continue to borrow, officials will scream to the heavens that it was Trump’s downgrade.
Just Tap It
For the first time ever, US credit card debt has reached $1 trillion. For the week ending July 26, total balances on credit cards and other revolving accounts exceeded $1 trillion, according to the Federal Reserve’s H.8 report, which examines the assets and liabilities of commercial banks. The report showed that it dropped down to $998 billion over the past week. This is an increase of roughly $300 billion from the epidemic low of $736 billion and $200 billion from the start of the year.
In the US market, credit card debt has always been common. Rising borrowing prices are the main issue facing the economy today. Credit card interest rates are almost at a 40-year high of almost 21%. Consumers may have to put up with another increase in the interest rate on a Visa or Mastercard because the Federal Reserve might raise rates again before the year is through.
What do market experts get when they combine high levels of credit card debt, rising interest rates, and rising cost of living? an increase in crime rates. The number of customers into serious delinquency increased to 5.08% in the second quarter, up from 3.35% in the same three-month period a year ago, according to the New York Fed’s most recent Survey of Consumer Expectations (SCE).
Another issue economists have discovered is that consumers haven’t completely utilized their credit lines. Despite banking institutions tightening lending requirements and declining credit demand, estimates suggest that individuals still have access to almost $3 trillion in untapped assets. The reliance on credit cards may only be beginning if half the population is living paycheck to paycheck and households are battling to stay afloat owing to crushing pricing pressures.
The $17 Trillion Question
The overall amount of household debt reached a new record high of $17.06 trillion, according to the SCE data from the New York Fed. Credit card debt ($45 billion) and vehicle loan debt ($250 billion) contributed the most to the gains. Another $1 billion was added by home equity lines of credit, and $15 billion was added by the “other” category to the total. Unsurprisingly, the amount owed on student loans fell by $35 billion, while the amount owed on mortgages remained largely steady between April and June.
This story really never ends, in my opinion. Uncle Sam is buried in debt, and the only ways he can keep up his spending spree are through borrowing, taxes, and printing. Tom, Dick, and Harry are either attempting to keep up with the Joneses or are just getting by by using credit cards and other forms of debt to buy food. Financial prudence is a thing of the past. Or perhaps the cost of living is too high for households to be able to save for a rainy day!