Brian B. Sullivan, CFA, President and Chief Investment Officer, Regions Investment Management
April 2, 2015
A column to help investors gain perspective on today's market noise
Debt: Yours, Mine, and Ours
Two aspects of debt are bothering investors. Student loan debt and federal government debt seem to be on investors’ minds. These two types of debt have been growing and are expected to continue to grow. Most other debt types have been shrinking, including consumer debt and corporate debt.
Student loans have doubled in the last several years. These loans have grown faster than the increase in the rate of tuition. For many, the accumulated debt is worth the extra earning power that a college or advanced degree can bring. But for some, the debt is too much. Default rates have been rising and the Federal Government, which “owns” $900 billion of the $1.2 trillion in student loans, should be getting worried. The concern for investors relates mostly to housing. With housing in a slump, new home buyers are seen as a solution. But if the average new home buyer is saddled with large student loans, it makes qualifying for a mortgage that much tougher.
I think the student loan problem is part of the mix of problems for housing, but not the main driver. Consider these facts. Only about 30% of adults are college educated. Of those, not all have a student loan. The average student loan is just under $30,000. This is reasonably close to what some would owe on a new car loan. While it may take a little longer to save up a down payment and the qualifying loan will be $30,000 less, it doesn’t seem that this is insurmountable. For those few with $150,000 in debt this is a real problem. Young people are not forming households, buying homes, or renting apartments at the usual rate, but student loans are only a small part of the problem. Job security is likely a bigger concern to those who might have started homebuilding in another era.
Federal debt is another issue. Federal debt amounts to over $18 trillion and is growing at about $500 billion per year. Per taxpayer the debt is over $150,000. In Washington they take comfort in the deficit being only 3% of GDP. Many economists consider a debt to GDP ratio over 100% to be excessive. Ours is 102% and growing. Investors are concerned about how we will pay this sum back. They are also concerned about rising interest rates, interest expense and a worsening debt picture. I am too. But there is little energy in Washington for austerity. Even after 6 years of economic growth, there doesn’t seem to be any tax revenue available for reducing the deficit and eventually reducing the debt.
Possible consequences of a high national debt level are numerous. High debt means the budget will be driven by interest rates more than it otherwise would. It means interest payments will soak up funds which could be used elsewhere. It means taxes will have to remain higher than they might be. Higher taxes divert funds from other uses such as building and equipment purchases. Slower growth of the national economy is likely in the tarot cards. Whether the slower growth comes as a mild drag on otherwise positive growth, or a hard braking of growth, is difficult to tell. At the moment Washington has neither the stomach nor the fortitude to make the changes necessary to deal with this looming problem.
You and I have paid down our debt as have the nation’s corporations, but Washington and some students have not. This will be a burden for them and also for us.
(c) Regions Bank, Member FDIC. The foregoing represents the opinions of the author, Brian Sullivan, and not necessarily those of Regions Bank or Regions Investment Management, Inc. (RIM). RIM provides commentary to clients of Regions Bank, an affiliated company wholly owned by Regions Financial Corporation. The information contained in this report is based on sources believed to be reliable but is not guaranteed as to accuracy and does not purport to be a complete analysis of the security, company or industry involved. Neither the information nor any opinion expressed constitutes a solicitation for the purchase or sale of any security. This report is designed to provide commentary on market strategy and the opinions expressed reflect the judgment of the author as of the date of publication and are subject to change without notice. RIM assumes no responsibility or liability for any loss that may directly or indirectly result from the use of such information by you or any other person. Investment advisory services are offered through RIM, a Registered Investment Adviser. RIM is wholly owned by RFC Financial Services Holding LLC, which in turn, is a wholly owned subsidiary of Regions Financial Corporation.
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