Any type of debt you can think of has reached all all-time high in the United States since early 2018. Debt in the US is now in the trillions of dollars, which should make investors and Americans alike wary of the rebound seen with the Dow Jones Industrial Average.
Dow Jones Recovery isn’t Trustworthy
Many influential investors have stated that the United States currently resides on a mountain of debt. The inference here is that its economy is stimulated by many artificial factors. These investors offer that if the economy were actually as strong as it appears, debt would be declining in the US economy instead of increasing.
In the same vein, economists mention that the recent rebound in the stock market isn’t driven by a strong economy, but rather by a technical bounce. Many believe that the US economy will dip back toward a recession in the coming years.
Is there a Looming Test for US Debt?
Student loans, credit card, corporate, government, and household debt have all achieved record highs in recent months. Reports show that for the first time in the history of the country, US debt crossed the $66 trillion threshold. This accounts for more than 80 percent of the world’s GDP.
The problem here is that US debt has left other countries in a difficult position as they struggle to address rising interest rates. The total debt of the US is now bigger than that of the UK, Germany, France, and Italy put together and then multiplied by ten.
Recent trade talks between the US and China, along with the US government reopening, have the Dow Jones surging along with Chinese and Japanese markets. The challenge, however, is that the US needs to focus on minimizing debt. If the market takes a downturn, many markets might be vulnerable.
An example of this type of vulnerability can be seen in the recent layoffs of State Street, Buzzfeed, and Tesla. These conglomerates laid off a big part of their workforce in an effort to adjust to current conditions of the market.
While many companies have yet to reveal their 2018 earnings reports, there are others who have missed market expectations. For instance, Intel shares dropped almost six percent after it was announced that the company missed its revenue projections for 2018.
Debt Cushion in Decline
The debt cushion, which protects senior loans through bankruptcy absorption, continues to dwindle at a rapid pace. This serves to build a risky and unstable system for investors. If the demand for junior debt continues to decrease, the US may see an economic downturn. This will in all likelihood lead to large losses for those who hold these types of loans.
While historically, these types of loans have been thought of as safe investments, if junior debt declines, so will the overall demand for loans. If there’s nothing behind these loans to support them, tough times could be ahead for loan holders.
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