Examining Total US Debt Growth in Q1 2020 & Our Future Prosperity

One of the most important things to know about macroeconomics in the 21st Century is that credit growth drives economic growth. In the US, when credit grows by less than 2% (adjusted for inflation), the country goes into recession. This occurred a total of nine times between 1952 and 2009. Policymakers understand this and they work very hard to ensure that credit continues to expand.

As an investor, it’s very important to monitor and attempt to forecast credit growth because that will significantly impact your current and future investments. In making these forecasts, it’s necessary to incorporate the assumption that the government and the Fed will adopt whatever policies they must in order to keep credit expanding. Using this framework it becomes easier to anticipate the policymakers next moves and to anticipate how those moves will impact asset prices.

In order to forecast for the future, it’s important to understand what has been happening in the past. That’s why we’ve pulled together a total breakdown of the total US Debt Growth in Q1 2020.

Overall Debt Growth in Q1 2020

During the first quarter of 2020, the US total debt jumped by $2.1 trillion – the most ever – and well above the previous peak increase of $1.4 trillion in Q3 2007.  In percentage terms, total debt was 6.6% higher in Q1 than one year earlier. That was the largest annual percentage increase since the second quarter of 2008. Alongside US debt, CPI rose 2.1% in Q1, the most in five quarters.

In the first three months of this year, total debt grew by $2.1 trillion vs. $3.3 trillion total debt in all of 2019. At the end of Q1 2020, total debt in the US reached $77.6 trillion and the ratio of debt to GDP rose sharply to 360% in Q1 (still below the peak of $381% in 2009).

Debt Growth By Sector

Now let’s take a look at debt growth by sector (quarter on quarter dollar change from Q4 2019 – Q1 2020):

Government Debt
Government debt has more than tripled since the end of 2007, from $6.1 trillion to $19.6 trillion at the end of Q1. The growth in government debt following the Crisis of 2008 kept the US and the world from collapsing into a new Great Depression. During the first quarter of 2020, government debt rose by $500 billion. The rise will be more severe in the second quarter. The government budget deficit was $2 trillion in Q2; and total government debt may have increased by more than that.

Corporate Debt
Corporate debt surged by $656 billion in the first quarter, nearly twice as much as the previous peak. This occurred because corporations drew down their credit lines from banks to avoid running out of cash. That means the banks are much more exposed to potential non-performing loans (NPLs) and loan losses during the quarters ahead. Percentage wise, corporate debt shot up by 6.6%, the previous peak being 3.9%.

GSE Debt (Fannie Mae and Freddie Mac)
GSE Debt expanded at a record pace of $340 billion during the first quarter. That tells us that GSEs bought mortgage debt to help supply liquidity to the financial markets and to help support the economy.

Non-Corporate Business Debt
Non-Corporate Business Debt also set a new record during Q1 growing by $152 billion.

Financial Sector Debt (excluding GSEs)
Financial sector debt grew at a record-setting pace of $560 billion in Q1 as banks, broker dealers and holding companies all scrambled to get cash. This was a record high in terms of percent change as well, at 7.5%, quarter on quarter.

Out of the $2.1 trillion increase in total US debt in the first quarter, corporate debt accounted for 31% of it.

Total Debt Growth in 2020

Total debt (adjusted for inflation) increased at an annual rate of 4.5% in Q1, the most since Q1 2008. Normally this would have been enough credit growth to generate a reasonable rate of economic growth, but there were highly unusual circumstances; COVID-19 and the corresponding lockdown that destroyed demand. US GDP contracted by 5% in Q1, and the second quarter numbers look to be much worse.

Looking Ahead

The Government will need to continue to borrow and spend as much as necessary to support households, small and medium sized businesses, large corporations and, thereby, the banks for as long as Coronavirus continues to damage the economy. If the government spends enough, then when the virus does die out, the economy will still be intact, and likely to recover quickly. If the government doesn’t spend enough, however, the economy will be much smaller when the virus ends and it will take many more years to recover.

The United States government can afford to borrow and spend $10 trillion dollars or more, if necessary, during this crisis. It cannot afford to allow the economy to collapse and then remain in a prolonged Great Depression. The country’s future prosperity depends on the government spending as much as it takes to keep the economy intact during the quarters ahead.

So far, the government has acted with tactical efficiency to provide the economy with the support it urgently needs. Let’s hope that Congress continues to vote for economic rescue bills that will hold the economy together until this pandemic ends. If it doesn’t, countless households, small and medium sized businesses, and corporations will default on their debt. Should that occur, the banking sector would spiral into a systematic crisis, credit would contract, and the country would be gripped by a severe economic depression that could last a decade or longer.

Author’s note: All statistical data reported in this article can be found here: https://www.federalreserve.gov/releases/z1/default.htm

This article is largely drawn from the reporting of global economist, Richard Duncan: https://richardduncaneconomics.com/