Right now, consumers in the United States are in debt to the tune of about $12.5 trillion dollars. That includes mortgages, credit cards, car payments, anything financed, etc. It’s a lot of money at a time when interest rates are relatively low and wages have been trending upwards for the last few years.
(This is a longer read, if you just want the one-paragraph summary, click here)
The economic picture doesn’t look too bad for middle-aged adults with a stable career, but things start to look different when you take a look at those who haven’t entered the workforce yet, or just entered it in the last few years. Entry-level positions in most industries have been drying up considerably, forcing younger people, who typically hold a substantial amount of student loan debt, to shy away from taking on other types of debt.
There is a serious disconnect right now between real estate prices and what the vast majority of people can comfortably afford. Jobs that used to be filled by those fresh out of high school or college are now being filled by robots, or the jobs have been eliminated thanks to advances in efficiency. Industrial and manufacturing jobs started dropping off considerably about 25 years ago, which was able to be absorbed by the job market thanks to service and retail positions. Our problem now is that the internet has made it extremely simple to just order what we want off of the internet (where else are you going to buy a $40,000 TV?), which is leading to massive retail losses in urban areas and now it’s starting to hit rural areas as well.
Professional services may still have relatively stable job numbers, but an economy based on debt and jobs cannot be sustained by the ~10 million professional service jobs in the U.S.
You might think the transportation sector is due for a huge job expansion in the next few years thanks to all of the products that are now being delivered straight to your door. The problem is: transportation jobs are holding steady and they are probably going to decline in the near future. Autonomous vehicles are safer than human drivers even when every other car on the road is controlled by someone with a pulse. When an appreciable percentage of vehicles drive themselves, the road is going to be a very safe place to be, assuming you aren’t controlling your car.
Logistics and delivery companies are already getting ready for the inevitable. Why would they want to pay someone the equivalent of $2,000 in salary and benefits to drive an 18-wheeler from New York to Los Angeles in four days when their self-driving truck can do it for the price of gas in two days?
The final piece of the puzzle comes in the form of a growing population. Some Western countries are experiencing very slow population growth, but not the United States. More people trying to fill fewer jobs will lead to massive unemployment and underemployment.
All of this comes back to housing. Mortgages essentially have control over the economy since they represent stability. While the number of mortgage applications are officially stagnant, those application numbers count people who already have one and it doesn’t take into account the growing population.
How does this affect debt? Lack of wages makes it hard, if not impossible to qualify for a mortgage in the first place, this in turn leads to higher rental rates. When demand for rental units go up, the rent rises and does not go down again even if another complex is built just down the street. Instead, the rates become the new normal. Savings rates go down, lending and borrowing tighten up, the economy as a whole gets worse (2008 recession) and people lose their jobs. Unlike previous recessions, employers are going to take the opportunity to streamline and automate.
Over the next 30 years, we will probably see a profound shift in the U.S. economy, probably necessitating some form of basic assistance being given out to most, if not all, of the population. Some may envision a universal basic income, others may want housing subsidies for all but the most wealthy, but at the end of the day, debt as we know it now fundamentally cannot continue to exist. It only takes one domino to fall to bring the rest crashing down. One small slip in confidence with our current system of debt and unsecured debt will be a thing of the past.
You can expect some sort of a trade-off between the government and businesses when the time comes to address the issue. One very real possibility is an agreement to raise business and capital taxes in exchange for making it much harder to discharge debt in a bankruptcy. Or a loosening of the rules put into place after 2008 to prevent banks from losing money they don’t have.
Debt as it exists now didn’t exist 80 years ago and its role in consumers’ financial lives probably won’t be the same 30 years from now.
Summary: Job losses are going to hurt an already over-inflated housing market. Businesses will choose to automate more of their workforce in response to cutbacks and loss of business. Mortgages – which is the baseline debt for America – will become of much less importance in the coming decades, probably leading to an enhanced public safety net.