Debt got you down? Duelling debt dramas pervade financial headlines from Oshawa to Orlando. Are North American governments – and consumers – living on borrowed time? With interest rates up, folks fear a reckoning.
Let us dissect it to grasp a different reality: U.S. or Canadian, government or consumer, these debts aren’t near any looming calamity. Markets see this clearly, while most people can’t. Let me show you.
The fiscal 2023 U.S. deficit doubled – widening fully US$1-trillion versus 2022. Many were rattled. Fitch’s August U.S. rating downgrade from a perfect AAA to AA+ and Moody’s subsequent negative outlook had the same effect.
Many see Uncle Sam careening toward insolvency while politicians fiddle in Titanic deck chairs. Spiralling Canadian governmental spending, an alleged mortgage meltdown and the Group of Seven’s “most-indebted households” status similarly spooked us here.
Miserable? Or misleading? Yes, many debt measures are up … significantly. But up doesn’t mean crisis. Few fathom just how manageable U.S. and Canadian debt loads actually are.
For example, take the endlessly-fretted government debt-to-GDP: While the United States’ 119.5 per cent is high historically, it is down substantially from the second quarter of 2020′s lockdown-and-relief-driven 133 per cent. Canada? Similar. Including social security, general government debt peaked at 143.8 per cent in the fourth quarter of 2020. The latest figure, from the second quarter, is 125.2 per cent.
And those figures are skewed. First, they include bonds the government, itself, owns in some governmental pockets somewhere. As assets and liabilities, these effectively cancel each other. Netting those out, which is quite technically the right way to do it, U.S. debt to GDP falls to 94.2 per cent. And Canada’s? Similar. Net out Canadian pension assets, and the second quarter’s federal debt to GDP is a boringly unalarming 58.2 per cent.
Regardless, debt to GDP compares a balance sheet figure to cash flow – apples to hockey pucks. Debt accumulates over time, while GDP measures annual economic activity. Ditch that. The financially correct but less used metric? Annual tax revenue versus interest payments. That measures what truly matters – a government’s ability to afford its debt. Affordability equals sustainability, which lets you know if this is crisis or crybaby.
Ending fiscal 2023, U.S. interest payments’ share of tax receipts was 14.8 per cent – lower than during most of the booming 1980s and 1990s. Even if rising rates buoy payments as many project, it won’t soon eclipse 1991′s record of 18.4 per cent. And, recall, 1991 was no crisis – but among the best times to buy U.S. stocks. Canada’s 9.3-per-cent debt service ratio is below the 11-per-cent average during 2009-20′s bull market. These aren’t alarming.
Ratings agencies’ negativity? U.S. and Canadian downgrades haven’t whacked markets. The Toronto Stock Exchange rose 52 per cent in the 22 months that followed Fitch’s June, 2020, Canadian downgrade, including dividends. The S&P 500 wobbled after Fitch’s August U.S. downgrade. But a lot else was also going on. It has recovered since.
What about consumer debt? Early 2023 data showing Canadian households were the G7′s most indebted heightened recession fears. What if job losses and defaults spiralled? A fair question, but also based on that comparison of debt levels to GDP.
Always think: Affordability equals sustainability. Canada’s second-quarter 2023 household debt service ratio was 14.8 per cent. That is below pre-COVID levels and quite common over the past two decades. And, it is mostly mortgages – 8.2 of the 14.9. The rest, at 6.7 per cent, is well below prepandemic levels. On mortgages, yes, service costs are up, but delinquency is historically low at 0.15 per cent.
Similarly, debt-o-phobes decry U.S. credit-card debt hitting US$1.1-trillion. But consider context. Through Nov. 1, U.S. bank deposits were US$17.3-trillion. Third-quarter GDP topped US$20-trillion annualized. A trillion isn’t huge relatively. No surprise, then, Americans are paying their bills.
In the third quarter, just 9.4 per cent of credit-card balances were more than 90 days delinquent, far below the early 2010s. Total U.S. consumer debt? Just 1.6 per cent of balances are 90-plus days delinquent. The last 20-year average: 3.9 per cent. It must balloon dramatically to threaten GDP.
Debt fears mask a big bullish reality: With so many fretting about politicking, spending, interest costs and so much more, sentiment remains low. That fear is in stock prices now – making room for them to trudge up the proverbial “wall of worry” young bull markets always climb.
No country or person can spend like drunken sailors on leave forever. Yes, I know – to some, national debt is bad on principle. Point taken. But if stocks and bonds shared that view, they would have shown it many decades ago. Simply, they don’t.
The chances debt becomes a financial problem any time soon are beyond remote. So don’t sweat the debt –now. It is currently a false fear – and false fears are always and everywhere bullish.
Ken Fisher is the founder, executive chairman and co-chief investment officer of Fisher Investments.
Be smart with your money. Get the latest investing insights delivered right to your inbox three times a week, with the Globe Investor newsletter. Sign up today.