When the Debt Hits the Fan

[courtesy Google Images]

Business Insider published an article entitled “Americans have $12.29 trillion of debt”. That article reported:

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“Americans are still adding debt.

“Household debt—which includes things as varied as mortgages and credit cards—increased to $12.29 trillion in the second quarter of 2016, an increase of $35 billion, or 0.3%, according to the Federal Reserve Bank of New York’s Quarterly Report on Household Debt and Credit.

“The biggest increases came from auto debt and credit-card debt, which ticked up by $32 billion and $17 billion.

“Mortgages, the largest section of household debt, actually decreased in the second quarter, according to the New York Fed. The decrease in mortgage debt seems to be driven by more people paying down their balances, as new mortgage debt continued to tick up.

“Student-loan debt decreased by $2 billion, to $1.259 trillion . . . .”

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According to Bloomberg, total U.S. corporate debt is about $30 trillion. The “official” U.S. national debt is about $20 trillion. Added together, that means the total U.S. household, corporate and government debt is at least $62 trillion.

The U.S. annual GDP is about $18 trillion. Thus, if we didn’t spend a dime on food, clothing, housing, autos, entertainment, etc. but devoted our entire GDP to repaying the total debt, it would take about 3.5 year of “austerity” (starvation, actually) to repay all of our debt.

Of course, we’re not going to stop eating, buying clothes, homes and cars, etc..

Therefore, it’s hard to imagine how we could repay more than 10% of that total debt on a yearly basis. That would work out to an “extra” payment of about $6 trillion/year which, when divided by the U.S. population of 320 million, would work out to an annual “fair share” of nearly $20,000 for every man, woman and child in America for every one of the next ten years. If you had a family of four, your family would only have to pay an extra $80,000 per year for the next decade to repay the existing debt.

That’s not going to happen.

Mathematical Implication: The total household, corporate and national debts of $62 trillion can’t be paid in full and therefore won’t be paid in full. Implication: There’s going to be a massive debt default at some point in the foreseeable future.

When? God only knows.

It could happen this year, it might not happen for five years. But it has to happen. When it does, the value of stocks will fall by at least 50%. The value of corporate bonds will collapse. The value of U.S. bonds will collapse. The economy will slide into chaos.

The only people likely to do well in such circumstances will be those who have capital saved and stored in a form other than paper debt-instruments (stocks, bonds, pension accounts, bank accounts).

That means that, when the debt hits the fan, whatever wealth you have should be in a tangible form. That could mean land, tools, guns, ammunition, or dehydrated food. But if you want to keep your wealth in a form that’s both tangible and liquid (able to be easily exchanged for other goods and services), you’ll want your saved wealth to be in the form of gold or silver coins.