Normally, economic expansion is driven by more spending by the wealthy, and you'd think that 2018 America, where the wealthy are wealthier than they've ever been, would be dependent on the few people with ready cash as engines of economic growth.
But it turns out that nearly all of the economic growth in today's economy has been driven by subprime borrowing by the poorest 60% of Americans, who have zeroed out their savings and then gone into heavy debt to get university degrees, start "businesses" (often by leasing a car to drive for a rideshare company or trying in some desperate way to get a toehold on the ladder), and maxing out credit cards.
It's like a rerun of the 2008 crisis in more ways that one. The loans that enabled this debt-fueled growth have low teaser rates that are starting to expire, with new, much higher interest rates about to kick in. When that happens, expect waves of defaults.
The Reuters piece, by Jonathan Spicer, also argues that the sell-by date of this unsustainable subprime-debt-fuelled growth may have been postponed by the Trump tax cuts. If anything, the picture may be even worse than that view suggests, since some experts, as well as our own readers, have said in some, perhaps many cases, the cuts in income tax withholding looked high relative to the taxes that would be due for 2018. In other words, more taxpayers than in the past may find themselves hit with unexpected tax bills come April.
Independent of whether bigger debt millstones around the necks of subprime borrowers are a harbinger of a slowdown, high levels of personal debt are a negative for growth. Personal borrowings are almost never productive. Even the often-hyped examples of borrowing for education or borrowing to start a business are overhyped. With higher eduction overpriced and the punishment for missing a payment draconian, the merits are at best debatable, and that’s before you factor in the risk of graduating during a recession or crisis. Similarly, since 90% of new businesses fail in three years, pray tell why is borrowing to start one a sound idea?
Mortgage, Groupon and card debt: how the bottom half bolsters U.S. economy [Jonathan Spicer/Reuters]
America’s Subprime Economy [Yves Smith/Naked Capitalism]
Where the Debt Slaves Are the Most Vulnerable [Wolf Richter]