Tyrannosaurus Debt: A “Deep Dive” Look at Debt and its Burden(s)

Key Points

  • Debt/deficits continue to be the most-discussed topic at client events; so we recently did an internal deep dive on the subject.

  • Total credit market debt sits at an astounding 350% of U.S. GDP (albeit down from 380% pre-financial crisis).

  • MMT surprisingly has adherents on both sides of the political aisle; but the reality is we can’t stay on this debt path indefinitely.

I am part of Schwab’s Asset Allocation Working Group—the group which, among other things, formulates our tactical asset allocation recommendations. As most readers know, I lead the charge on recommendations associated with the U.S. equity market. As a reminder, we are currently neutral on U.S. stocks overall; within which we have an overweight to large caps and an underweight to small caps. But in addition to discussing these recommendations and proposed updates thereto, we also spend a lot of time as a group doing “deep dives” on myriad topics of interest to us and Schwab’s investors.
The latest deep dive we covered was on a topic that remains top of mind for investors based on my travels and visits with our investors (especially during Q&A sessions at events at which I’ve spoken). Although politicians seem to be whistling past the debt yard, the deficit and debt remain at the top of the list of longer-term concerns of our investors.

This report will be an inside look at what we covered during our debt deep dive. I want to give a shout-out to my new research associate, Kevin Gordon, for his assistance with this project, his presentation of some of its components during our meeting, and his contribution to this report.

Starting with the conclusion

We are firm believers that high and growing debt is a burden on economic growth. Regardless of the cavalier attitude toward debt in Washington—on both sides of the political aisle—and the recent bipartisan focus on Modern Monetary Theory (MMT), we are not swayed from the view that high and rising debt has a “crowding out” effect on the economy (more on MMT later in this report).

Although this report will focus on the United States, and federal debt in particular, we are not on an island with regard to profligacy. In the 10 years that followed the Global Financial Crisis (GFC), global financial debt rose from $97 trillion to $169 trillion, according to McKinsey & Company; while the International Monetary Fund (IMF) warns that high global debt threatens to exacerbate global economic downturns.