Comstock Partners, Inc.April 07, 2017
Debt Can be Looked Upon in Various Ways
What is the Real Total Debt in the U.S.A.?
Comstock has been discussing the debt situation in our country for years. We wrote a “special report” discussing the various forms of debt and explained how the debt is incorporated in “The Cycle of Deflation” (see attachment) as the debt was hindering many speculators and investors just before the dot.com bubble was about ready to collapse. We warned that the debt was the main reason that the valuations were the highest in history and would eventually break the market. This was exactly what took place starting in March of 2000 when the stock market crashed and a severe recession began.
We again warned our viewers about the problems of excessive debt during the housing bubble of 2005 to 2008 when Alan Greenspan, the Chairman of the Federal Reserve at the time, decided to lower interest rates to 1% in June of 2003. This caused the largest housing mania of all time. Banks were virtually pushing money to anyone that wanted a loan to buy a house (whether they could afford it or not.) Back then--they called these loans “no doc loans”. These were loans that were made without any documentation whatsoever.
The amazing part of this era was that Greenspan warned stock investors about the “irrational exuberance” that was taking place in the late 1990s as the stock market rose almost every day. The “irrational exuberance” speech drove the market down, but that only scared off investors for just a few days and the stock investors regained the losses almost immediately. After observing the voracity of the market that could not be held down, Greenspan changed his mind and confessed to being wrong about his warnings just before the real break took place in early 2000. He also witnessed the housing bubble, and not only did he support the banks making the loans, but actually encouraged the banks to continue making these insane loans.
This leads us to the old time phrase, “fool us one time, shame on you, fool us twice shame on us.” When the current debt bubble breaks and the stock market collapses we could say, “Fool us 3 times and we should be banned from trading and investing in the financial markets.” Unless we can understand why the debt caused the collapse in 1929 (after the roaring 1920’s), in 2000, and 2008, we should be forced to compare the debt to GDP in all of these times to the present.
If you were forced to do this you would look at the debt and be shocked at how much the debt grew over the past two decades. If you are a Democrat you might compare how much the debt grew under President George W. Bush and use examples of how much it grew during the eight years of his administration. You could make comparisons like the debt grew more under George W. than all past presidents (going back to George Washington). If you are a Republican, you could make the same comparisons of how much the debt grew under Barack Obama and make the same comparisons (going back again to George Washington). If you did make these comparisons you would come close to going out of your mind, because it would have to scare you.
The amazing thing is the fact that you would be making the comparisons erroneously since you would look at the debt doubling under George W. and then doubled again under Barack Obama, and think we are in real trouble. However, the debt you would be using is strictly the government debt, and get scared as hell when you see the debt is now just about equal to the GDP of the greatest country in the world at about $20 trillion apiece.
If, on the other hand, you were looking deeper into the debt and could see that the debt has grown much more than the GDP of our country. In fact, the real debt relative to GDP is actually about 370% of GDP if you include the government debt, the state and local debt, student debt, credit market debt, and the loans made to foreign banks overseas. The 370% of debt relative to GDP also should include all of the entitlements and other off balance sheet debt that we include now. These are obligations that have been guaranteed to most of the people in this country such as the entitlement promises of Social Security, Medicare, Medicaid, and government employee pensions. If you take all of them into consideration the debt to GDP would not be just 370% but closer to another $40 trillion of debt which would take the total debt to over 500% of our GDP. If that doesn’t scare you nothing will!!
Now that President Donald Trump will probably have as much trouble with his other agenda items as he did with his repeal and replace of healthcare, the market could have real problems. And when this enormous debt comes to light, we would expect the market to decline sharply. The only way that the Trump Administration can survive without moving his agenda quickly this year would be to grow the economy close to the rate of 3 to 4 % as he predicted. But it is very hard to grow nearly that fast with these demographics, retiring baby boomers, fewer immigrants--it is impossible to get corporations to make capital expenditures and productivity to increase without being able to increase the labor force. This is why they are in such a bind!