Borrowing Our Way to Prosperity?

Americans are driving the US economy along with borrowed money. The question is how much longer can it last?

Consumer debt surged once again in December as Americans charged up their credit cards for the holidays. Total consumer credit grew by $22.1 billion in December, according to the latest data released by the Federal Reserve. That represents an annual growth rate of 6.3%. Total consumer debt now stands at a record $4.197 trillion.

The Fed consumer debt figures include credit card debt, student loans and auto loans, but do not factor in mortgage debt.

A big jump in credit card balances drove the big rise in consumer debt in December. Revolving credit was up 14%. Americans have run up nearly $1.1 trillion on their plastic. The big jump in credit card debt reversed a trend of slowing consumer borrowing, but this was not unexpected during the December holiday shopping season.

Non-revolving credit, including auto loans and student loans, grew by 3.7% in December. Total non-revolving debt outstanding stands at just under$3.1 trillion.

Through 2019, consumer debt grew by $187 billion, a 5% increase.

Looking at the bigger picture reveals some troubling trends.

In the first place, Americans are driving the US economy along with borrowed money. And in the second place, there are signs borrowing is slowing down, December’s holiday shopping binge notwithstanding.

Consumer borrowing represents nearly a quarter of the $849 billion increase in nominal GDP over the same period. As WolfStreet points out, without this $187 billion in additional spending funded by $187 billion in additional debt, the US economy would not have grown 2.3% in 2019, but only by about 1.8%.

This is why economists from the Fed on down want policies that encourage consumers to spend money they don’t have. It’s the American thing to do. And if there’s a hiccup down the road, so be it.”

Well, there may be some hiccups.

The big surge in credit card spending in December was something of an anomaly.  Prior to the holiday season, the overall trend in borrowing fell flat over the prior six months and credit card borrowing took a noticeably steep downturn.

Some are taking the sagging level of borrowing as a warning sign. As one analyst put it in an article on Seeking Alpha:

It could be that the consumer end of the economy has reached the point at which it cannot add any more debt. Unlike the federal government which has sovereign dollars to print, the consumer has a fixed amount they can spend including paying back any loans.”

Currently, total consumer debt stands at 19.3% of nominal GDP. This is the highest level ever, according to WolfStreet.

In terms of percentage of GDP, credit card balances have not reached the insane levels we saw prior to the 2008 crash, but Americans have burdened themselves with huge automobile loans and piles of student debt.

The question is how long can the borrowing keep going. Because when it stops, economic growth will likely stop along with it.

During an appearance on RT Boom Bust, Peter Schiff painted a pretty gloomy picture of the American consumer.

The consumer is completely levered up. He has record amounts of debt.  And the only reason he can spend is because the Fed is keeping rates low enough so that credit continues to flow despite the lack of legitimate savings to finance it. So, this whole house of cards is going to come tumbling down and the consumer is going to be right in the center of that.”

In simple terms, running an economy on credit cards is not a sustainable economic model. You can’t borrow your way to prosperity.