It is generally accepted that consumers account for approximately 70% of national GDP. With that in mind, it is important to consider the state of consumer debt. While it is difficult to access precise data, it appears that Americans have been maxing out their credit cards after years of inflation. One indicator is the rapid rise of companies offering “buy now, pay later” plans. According to a recent Lending Tree survey, approximately 50% of consumers have used a buy now, pay later service. A recent Federal Reserve paper concluded that consumers spend more when offered a buy now, pay later plan and that many financially vulnerable consumers may be further overextending themselves.
Consumers aren’t the only ones digging themselves into a debt hole. Our economy is increasingly fueled by leverage as investors, businesses, and government are also taking on more debt. Investors have been increasing their margin debt as they chase rapidly moving meme stocks. Retail investors have increased their borrowing to participate in market exuberance and the expectation that interest rates are likely to start going down.
Some corporations have been raising capital by increasing debt to cope with tariff costs, pay dividends, buy back shares and prepare to make major investments in emerging technologies.
Nobody knows where all of this will end. Many are expecting (hoping) that the government will bail out overextended investors and consumers. Of course, that would only result in an increase in the federal deficit. History suggests that excessive borrowing, over long periods, does not end well.
All comments and suggestions are welcome.
Walter J. Kirchberger, CFA
