The Debt Cycles and Possible Coming Economic Squeeze

Currently the USA has about $22 trillion in debt, students have $3 plus trillion in debt, and housing mortgages in many geographic locations exceed market value for the home of many families.  In addition, there exists large amounts of auto and credit card debt for the consumer.  Also, the energy sector has accumulated over $3 trillion in debt for recent investment in oil wells over the last 8 years.  When you combine this with the fact that the US government has not properly invested in education, health care and infrastructure, there is a looming disaster and chaos possible from what is known as the debt cycle.  When and as interest rates reach normal levels, equity prices will inevitably fall.  If the US and international political landscape continue in chaotic fashion, the debt levels will be unsustainable and therefore not serviceable.  A large portion of the debt payments will have increased as interest payments.

As a result of the debt, and lack of investment, the possibility of unmanageable debts increases; markets will become tumultuous at best.  In this case the only way for the consumer or family to survive free from experiencing a squeeze is to maintain zero debt levels with a large emergency fund, and employable skills.  This means a paid for house and cars, adequate savings, sustainable income and skills to remain employed will become the only saving grace.  All other families who are not in this situation could be squeezed to the point of no return financially.  The question is how can this be overcome by our government and families?

The first step to a balanced financial situation is education and employable skills.  Make sure at an early age you take care to account for this.  Families that do not have enough money to provide higher education for their children may have to depend on a child working some amount of time while going to school; this can be difficult but it is attainable with family support.  Children may have to live at home longer and attend community colleges first.  Consider scholarships and financial aid.  However, do not take on more debt than your possible career can manage.  The next step is to accumulate an adequate emergency fund.  This can be done by setting aside money each pay check in a savings account or money market account.  For families that do not have this extra cash flow you may need to consider two wage earners, less expenses for cost of living, or more income.  However there are circumstances when none of these items can be achieved.  This is a difficult situation I cannot address in this post.  Next consider paying cash for as much of your lifestyle as you can.

Debt cycles are caused by investment cycles.  Debt cycles become unmanageable when overinvestment has reached a point where revenues are not sufficient enough to service the debt.  When debt is not serviceable, financial institutions become vulnerable to runs on deposit, and insolvency which leads to further losses in financial institution confidence by the people.  This is a dangerous scenario we saw in 1998 and 2008.  Through Federal Reserve tools, and fiscal policy, depressions were avoided in these years.  However a society will reach a point when it can no longer kick the can down the road.  At this point the society cannot finance health, infrastructure and education because no one is willing to buy its debt if not serviceable, such as in a high interest rate environment.  When faced with the choice of austerity or nonpayment of debt what happens?  Either a taxpayer bailout, or a depression followed by a society that falls to a lower level of standard of living.

A solid answer is public and private sector investment in education, health and infrastructure.  Investments in these three areas have long payback periods.  However, the return on these investments is extremely large even though in the moment one cannot seem to justify the investment given the debt level.  If society fails to take advantage of the low interest rate environment, then given the debt and economic life cycle age of the global economy the outcome will be disastrous at best.  Investment in education, health and infrastructure provides immense economies of scale and returns for society that are very difficult to measure, but certainly the answer to all that ills.