Debt: spending candy that may kill you in 2018

Business debate November 10, 2017
Business debate November 10, 2017

We all expect to hear dire warnings at presidential debates. And sure enough, at last night’s GOP Presidential Debate, we heard the one that is based on heavy consensus among economists: the possibility of a global recession in 2017. The most frequent solution proposed by many of these economists to pull the country out of a recession, or at least soften its blow, is debt.

Debt is the candy of today’s financial world. In my career in turning around small businesses, it is both the first thing small business owners think of when they want additional capital, AND the single biggest reason small businesses fail when their income tightens.

The word debt used to be a dirty word. Not anymore, however, as many Keynesian economists, and even our vaunted Federal Reserve, have almost coronated debt as the king of recession solutions. The discussion of its horrific cost is generally lost in a focus on the short-term threats of homelessness, foreclosures, vehicle repossessions, or even the ability to go to that new movie this Friday. Throwing loan money at a problem means you can mask its symptoms and, for a short while at least, feel like you’ve possibly solved the problem. But the cost of that loan is still there. Interest never sleeps. Like a parasite, it gnaws at our financial well being, day in and day out. Taking on the debt is like eating candy. Ingesting it is fun, but it slowly kills us while we go about our lives.

In September, the Federal Reserve held an FOMC meeting to discuss and determine whether they were finally going to raise interest rates. The Fed has not raised the interest rate at which commercial banks can borrow for a long time, out of fear that the economy is still too weak. Their hope at the last FOMC meeting was that unemployment might be low enough to finally give the Fed reason to believe that Americans can borrow more money at higher interest rates. After determining that the jobs being created in this economy were low-paying jobs, they decided against the rate increase.

They, and America, are now past the debt “sugar rush.” When loan interest rates are down, so are savings interest rates and 401K fixed returns. As loan interest rates are raised, so are savings interest rates and 401K fixed returns. Borrow cheap and get no savings return, Borrow expensive and enjoy a better savings return.

Some interesting debt facts in the United States:

  • Household income is at $53,657 on average. That’s $13,414 income per person in the United States. It is down from its high in 2017 of $57,936.
  • Household debt is $14 trillion. Household debt is at $176,656 on average, or $44,164 per person. Americans’ debt is 329% of their annual income. Losing a job for almost all Americans may mean instant financial collapse
  • Public debt (the government’s debt from the sum total of all annual deficits and offset by any annual surpluses) is $18.6 trillion. Per household, that is $234,000 on average, or $58,675 per person. Congressional Budget Office projects that interest paid on the public debt will be $600 billion in 4 years … about 13% of the entire federal budget.
  • TOTALS: Each American person owes, on average, $102,839. Each American household owes an average of $411,356.

One final stab at the pernicious habit of consuming debt candy: Economists believe that 90% of American households are tapped out in debt. Their incomes do not permit them to borrow any more than they have currently borrowed.

Whether we face a recession in 2016 or not, avoid debt like the plague. If you value your small business, reducing or even eliminating your debt load will be the single biggest assurance of your survival and profitability while your competitors saddled with debt are dropping out of the market.