Money has become easier to borrow thanks to the federal government slashing interest rates three meetings in a row. Lower rates make it cheaper for households and businesses to borrow and refinance existing debts. According to the New York Federal Reserve, household debt is up 0.7% during the third quarter, continuing a five-year climb encouraged by low unemployment, cheap borrowing costs, and consumer confidence.1
Consumer debt is now about $1.3 trillion higher than its previous peak in 2008, but this doesn’t account for inflation or the larger size of today’s economy. Household debt has increased about 25% from the post-recession low of $12.7 trillion. Student load debt has grown by 1.4% to $1.5 trillion and credit card balances rose to $13 billion in the third quarter. Credit card rates recently hit their highest level in 25 years, 17%, which makes for a costly way to borrow money. Mortgages are still the largest chunk of Americans’ debt coming in at $9.44 trillion, which is up by $31 billion or 0.3% from the second quarter.2
So, what could this mean? High levels of debt reduce our government’s flexibility to respond to emergencies, wars or recessions. In fact, one of the reasons our nation was able to recover from the Great Recession more quickly than other countries was because our debt was fairly low – 35% of GDP, before the financial crisis began. Gross Domestic Product (GDP) is one of the most common indicators used to track the health of a nation’s economy. Currently our nation is at 78% GDP, so if we were to have another recession like 2007 it could be harder for our nation to recover.3
As the federal debt grows, the government will spend more of its budget on interest costs, which could crowd out public investments. Over the next 10 years, the Congressional Budget Office (CBO) estimates that interest costs will total $5.8 trillion. The U.S. spends more than $1 billion per day on their interest payments.4 Typically, when a government can’t make debt payments, they will turn to raising taxes for consumers and property owners.
We’ve had a great Bull Run with the market the last 10 years which causes people to be more relaxed when it comes to borrowing money and having their investments tied to higher risk vehicles. While we can’t predict when there could be another recession like that of 2007, we do believe we can’t sustain this kind of economic environment forever. As we help people prepare for retirement, we encourage them to reduce debts and to start thinking about shifting their investments from an accumulation phase to a preservation phase to align their investment objectives with their risk tolerance (the amount you are comfortable having at risk). Understanding the risks you are taking and making a plan for when the market drops can be a huge stress reliever.
If you would like to discuss your portfolio and see what options are available to you, give us a call at 801-465-6990.
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