Congress recently approved a substantial increase in discretionary spending for 2018 – up $150 billion. As the US economy continues to up defense spending, so the pressure is being brought to bear on the average tax payer. The situation is not being assisted by tax cuts that are likely to result in significantly lower revenue streams for the government moving forward.
However, the USDs strength and appeal are likely to continue to attract foreign investors. From a macro perspective, the only major factor that is likely to impact the US credit outlook is an inward-looking trade policy. That would happen if Trump’s election promise of protectionism is implemented. In 2017 the US debt to GDP ratio was 77%, but it’s the deficit of 3.4% of Gross Domestic Product (GDP) that is worrying.
From Macro to Micro: How the Debt Burden Filters Down to the Average Taxpayer
At a macroeconomic level, the US national debt is standing at $20.924 trillion. That amounts to a debt per citizen of $63,925, and a debt per taxpayer of $172,669. Given that the US federal tax revenue is $3.368 trillion, and $10,292 per citizen, there is reason for concern.
US household debt is on the rise and is now hovering around $13 trillion (as at December 31, 2017) according to the Center for Microeconomic Data at the Federal Reserve Bank of NY. Quarter on quarter, total household debt increased by $193 billion to max out at $13.15 trillion heading into 2018. Credit card debt spiked $26 billion to reach $834 billion by the end of 2017. The latest statistics are likely to show an even higher debt tally.
- Mortgage Borrowing Has Increased by 3%
- Consumer Spending Has Increased by 3.8%
- Consumer Credit Has Increased by 7.8% on an Annualized Basis
Overall, the US economy is performing better than expected, as real estate assets increased by $454.3 billion (the highest tally since Q3 2016). For companies, quarterly liquid asset holdings increased from $2.43 trillion to $2.5 trillion, and federal government obligations dropped by 0.2% on an annualized basis.
These statistics are a mixed blessing to households. While US economic growth remains robust, there are concerns with respect to rising credit card debt and personal lines of credit. Student loan debt, automobile loans, mortgage loans and other household debt components are making it difficult for US households to neutralize the debt effect on earnings potential.
Foremost among the concerns is the Federal Reserve Bank’s quantitative tightening policy. According to the CME group FedWatch Tool, there is an 88.8% likelihood of interest rates rising by 25-basis points on Wednesday, 21 March 2018. This will cause the interest rate to rise in the region of 1.50% – 1.75%. The impact of an interest rate hike on personal disposable income and debt obligations is substantial.
Every time rates rise, the burden placed upon US households through interest-related repayments increases. While only a 25-basis point rate hike, the net effect of multiple rate hikes eats into the PDIs of households. And yet, despite all these exigencies, there are several positive elements evident in the US economy – notably the reduction in personal taxes that puts more money in taxpayers’ pockets.
Coming to terms with debt obligations is never easy. However, there are many examples of success stories that indicate how this is possible. The story of Tyler Perry is a case in point. He went from being destitute to a net worth of $400 million + thanks to a 5-point strategy for financial success. Perry implemented Oprah Winfrey’s advice and decided to make something of his life by following these lessons:
- Narrow Your Focus
- Focus on Your Money
- Know the Target Market
- Save As Much As Possible
- Believe in Oneself above All Else
Fortunately, his is one of many success stories in the US. Despite their differences, the similarities between such stories are as clear as day. It’s all about focusing on the big picture and putting strategies into play that reduce the debt burden and increase savings. When every household takes care of their own finances, the macroeconomic perspective begins to improve.
Various techniques can be used to reduce the debt burden, notably lower interest-related repayments on outstanding lines of credit through measures like debt consolidation, debt mitigation, debt settlement, and credit counseling. The goal is always to reduce the debt burden by cutting one’s cloth accordingly. If you live beneath your means, you will always have excess cash available at the end of the month.