February 28, 2019

What Comes After a Trillion?

Headline in Bloomberg the other day:

“Millennials Are Facing $1 Trillion in Debt.”

A trillion always sounds like a lot. It is a lot.

But while the absolute number is large, that is not the issue. The issue is the composition of this millennial debt. It’s mostly student loans, and a staggeringly high amount of these loans are in delinquency.

And this is at the top of an expansion!

As I’ve said a half a million times, debt kills. People contemplate suicide over debt. Usually because it’s gambling debt that they welched on, and they are about to get their legs broken. But also because some people have so much student loan debt that they’re 29 years old and it’s already checkmate.

On a societal level, imagine what happens if we hit a rough patch in the economy and these student loans—which are already 10% delinquent—go to 40% delinquent?

Revolution.

I don’t want to get all Book of Revelation on you, but debt historically led to war and inflation and autocracy.

Once you know that, you develop a healthy respect for debt and the destruction it can cause.

Wall Street folks often view debt as a numerical abstraction. Like, if the default rate rises to 6%, then high yield spreads over Treasurys will go from 300 to 700 over.

That’s the kind of gearhead stuff most analysts talk about. I recognize the opportunities that it will create in the corporate bond market, but I’m also conscious of the impact on human beings when people apply too much leverage.

Again: debt kills.

Millennials

In the case of millennials, they made decisions to take out student loans when they were too young to make these decisions.

Someone in the Bursar’s Office stuck a form in front of them and said “sign here,” and without a second thought, these 18-year-olds signed their future right down the drain.

Borrowing money to go to school is shockingly easy. Borrowing money to buy a house is very hard. That probably explains the difference in the delinquency rate.

Source: Bloomberg

When millennials say that it isn’t their fault and the debt should be forgiven, they’re half right. They’re guilty of having a high agreeableness score and shocking levels of innumeracy, but they’re not deadbeats any more than any other generation are deadbeats.

And they’re not any more prone to profligacy. In fact, student loan debt has crowded out other kinds of debt, notably, mortgage debt. They can’t get a mortgage, which means they can’t build equity, which means they can’t take part in the greatest savings program known to mankind.

Nobody does this deliberately. If I were contemplating taking out six figures in student debt, I would build a spreadsheet to figure out how long it would take me to pay it back. 99.9% of these people do not do this.

Are they wrong? Or do we just need to lower expectations?

This talk about forgiving student loan debt is dumb (because remember, you have to respect the rights and property of the lender).

If I were running this hamburger stand, I would work to compel student lenders to enforce the same sorts of credit standards that banks do when they issue mortgages. Naturally, that would result in fewer people going to college—or, at least, to expensive colleges.

That is okay! It would force colleges and universities to think a little harder on the sprawling bureaucracies they’ve built for themselves, along with the 5-star accommodations. The University of Michigan famously employs 93 full-time diversity staff, the top 26 of which make six figures.

Yes, college could be cheaper.

The Way Out

My colleague John Mauldin talks about debt a lot. He talks about it more from a macro perspective. Lately, I have been focusing on it from a micro perspective.

The national debt is huge, and growing, and is a problem. At our current trajectory, and unless we take corrective action, we will also be in checkmate.

Having said that, there may not be tangible economic effects for a while. Deficits do matter, but with a very long lag.

If a household goes into debt, the effects are not lagged—they are immediate.

Even if a recession doesn’t happen, the absolute best-case scenario is that people limp along with crushing debt service, crowding out consumption and investment. People live in poverty, retire in poverty, and die in poverty.

You might think this is a funny time to get revved up about debt, especially because in last week’s issue, we showed that debt service as a percentage of disposable income has dropped to an all-time low.

This is a personal mission of mine. I talk to people and I hear stories about how debt constrains behavior. It sucks up all the free cash flow. I bet if people had an extra $1,000 a month in free cash flow, they’d at least find something fun to do with it.

I paid off what was left of my debt two months ago. Tomorrow is the first of the month—no mortgage payment! Sublime.

I hope one day everyone gets to experience the same feeling of liberation.

Jared Dillian
Editor, The 10th Man

Share Your Thoughts on This Article

Was this email forwarded to you?
Click here to get your own free subscription to The 10th Man.

Use of this content, the Mauldin Economics website, and related sites and applications is provided under the Mauldin Economics Terms & Conditions of Use.

Unauthorized Disclosure Prohibited

The information provided in this publication is private, privileged, and confidential information, licensed for your sole individual use as a subscriber. Mauldin Economics reserves all rights to the content of this publication and related materials. Forwarding, copying, disseminating, or distributing this report in whole or in part, including substantial quotation of any portion the publication or any release of specific investment recommendations, is strictly prohibited.
Participation in such activity is grounds for immediate termination of all subscriptions of registered subscribers deemed to be involved at Mauldin Economics’ sole discretion, may violate the copyright laws of the United States, and may subject the violator to legal prosecution. Mauldin Economics reserves the right to monitor the use of this publication without disclosure by any electronic means it deems necessary and may change those means without notice at any time. If you have received this publication and are not the intended subscriber, please contact [email protected].

Disclaimers

The Mauldin Economics website, Thoughts from the Frontline, The Weekly Profit, The 10th Man, Connecting the Dots, Transformational Technology Digest, Over My Shoulder, Yield Shark, Transformational Technology Alert, Rational Bear, Street Freak, ETF 20/20, In the Money, and Mauldin Economics VIP are published by Mauldin Economics, LLC Information contained in such publications is obtained from sources believed to be reliable, but its accuracy cannot be guaranteed. The information contained in such publications is not intended to constitute individual investment advice and is not designed to meet your personal financial situation. The opinions expressed in such publications are those of the publisher and are subject to change without notice. The information in such publications may become outdated and there is no obligation to update any such information. You are advised to discuss with your financial advisers your investment options and whether any investment is suitable for your specific needs prior to making any investments.
John Mauldin, Mauldin Economics, LLC and other entities in which he has an interest, employees, officers, family, and associates may from time to time have positions in the securities or commodities covered in these publications or web site. Corporate policies are in effect that attempt to avoid potential conflicts of interest and resolve conflicts of interest that do arise in a timely fashion.
Mauldin Economics, LLC reserves the right to cancel any subscription at any time, and if it does so it will promptly refund to the subscriber the amount of the subscription payment previously received relating to the remaining subscription period. Cancellation of a subscription may result from any unauthorized use or reproduction or rebroadcast of any Mauldin Economics publication or website, any infringement or misappropriation of Mauldin Economics, LLC’s proprietary rights, or any other reason determined in the sole discretion of Mauldin Economics, LLC.

Affiliate Notice

© Copyright 2019 Mauldin Economics