MARK RIEPE: Hello, and welcome to the Schwab Market Snapshot for October 11. I’m Mark Riepe, sitting in for Randy Frederick.
We’ve got an election coming up in a couple of weeks and, not surprisingly, we’re hearing a lot from different politicians. But one thing they’re not really talking about is the amount of debt that’s present in the U.S. financial system. With me to discuss this issue is Liz Ann Sonders, Schwab’s chief investment strategist. Welcome, Liz Ann.
LIZ ANN SONDERS: Thanks, Mark. And thanks for tuning in, everybody.
MARK: So, Liz Ann, you published a report on Monday where you talk about the overall debt load in the economy. Why does this even matter to investors?
LIZ ANN: Well, you know, there are economists out there that think we ought to just spend money like crazy and that debt isn’t really going to influence how the economy grows. But it actually does. I think an ever-rising burden of debt and the need to finance that debt really crowds out the ability for an economy to grow. And I think debt is the primary reason why we have been in a very sluggish growth environment—not only for this cycle—but really going back to the early 1980s, when we started what really became this debt bubble. So I think given that we’re, you know, well over 300% of GDP in the broadest measure of debt—I think that that’s one of the constraints on economic growth.
MARK: Liz Ann, in your report you mention that there were different types of borrowers in the economy. And while we’re all familiar with the fact that government debt is going way up, what’s going on with the private sector?
LIZ ANN: So the private sector has two pieces to it, there’s the business side and the household side.
So, on the business side, corporate debt has actually been going up. But, to some degree, for many companies it’s a rational decision to borrow at today’s incredibly low interest rates, in many cases, not because they need to—they have a lot of cash on the balance sheet—but it’s a rational decision to take advantage of such low rates. Unfortunately, instead of investing in long-term capital spending projects, which would be to the better benefit of the economy, they’ve been taking the proceeds of that debt and buying back their own stock—which has been great from a stock market perspective, but certainly less so for the economy.
And as far as households are concerned, the financial crisis really just unleashed a massive era of deleveraging, and that’s the environment we’ve been in since 2008. So massive, that if you look at debt as a share of disposable personal income, the common way we measure household debt—not only is that now well below the long-term trend line—if you draw the trend line exclusive of the debt bubble, so call it a pre-debt bubble healthier trend line, we’re even a little bit below that. And just as important is servicing that debt—the cost of servicing that debt is incredibly low right now. So consumers have less debt in an aggregate sense, and the ability to finance or service that debt is also quite easy for them. So households are in great shape.
MARK: I want to go back to the private sector for a second. We normally don’t think about private sector borrowers as being sort of models of frugality. So what’s behind this reduction in debt usage, and do you think it’s a temporary thing, or something that’s more permanent?
LIZ ANN: I think it’s something a bit more permanent. You know, if we think back to our parents’, maybe grandparents’ generation, having gone through the Great Depression, many of them talk about—they really were changed by that for the rest of their lives. They became more frugal. They were less focused on taking on more debt. And I think, to some degree, we launched a new generation, as well, a more frugal consumer, more cognizant of the perils of taking on too much debt. So, you know, you took interest rates down to zero percent, long-term interest rates down to record lows, but it didn’t stimulate the kind of borrowing binge that you have seen in the past. We’ve also seen that other forms of windfall that have accrued to the consumer, things like the big drop that we saw in oil prices, only about a third of that went toward consumption. So we have a consumer that is much more biased toward saving over spending. Gallup does a poll on a yearly basis, and as recently as 15 years ago there wasn’t much of a difference in terms of preference to save versus preference to spend. But the most recent release of that showed 65% preferred saving over spending. So—and I do think that this is not just in the few years after the financial crisis, but probably lasts for many years to come.
MARK: Great. That’s great information, Liz Ann. That’s all the time we have for today. If you’d like read more from Liz Ann you can do so at Schwab.com/Insights, or you can follow her on Twitter @LizAnnSonders. That’s it for today. Randy Frederick will be back next time. As always, invest wisely. And own your tomorrow.