“I only looked away for a second!”
If you know any cops, you’ll have heard them say the one line they hear at almost every accident scene is, “I only looked away for a second.” One limitation of human perception is that we simply can’t focus on everything around us at once. There’s simply too much visual and auditory data coming at us to take it all in. But when our attention is focused somewhere, even for a second, a lot can happen in the rest of our world. That inability of humans to see all parts of a scene at once is what keeps magicians in business.
Humans can also become collectively distracted, a phenomenon we see happening in the current presidential election. This year’s presidential election is consistently cited by analysts as one of the major factors weighing on both business investment and consumer spending. While the news cycle is dominated by the punch and counter-punch of politics in the digital era, there are risks creeping up on the markets that are going largely unnoticed.
Sheila Bair, former head of the FDIC in 2006, was one of the few people in government to see the mortgage lending crisis developing and try to stop it. Today she sees the $1.4 trillion in student loan debt as the next debt bubble that could trigger a crisis. She sees that load of debt as an anchor on the economy that sidelines an entire generation during the most productive years of their lives. Instead of being out there helping the economy grow, young people are buried under ten years or more of massive debt. Bair points out correctly that no bank would be able to get away with what the Department of Education is doing with student loan lending.
Just like the housing debt crisis a decade ago, the Department of Education is dishing out debt without making the slightest assessment of whether students are going to be able to pay back the money. Young people are putting off getting married, delaying starting a family and are not buying homes because they’re carrying around massive loads of debt.
Young people aren’t the only ones piling on the debt, so are the nation’s corporations, and with far less excuse. With ten years of accommodative monetary policy behind us, corporate debt has surged to over $6 trillion dollars. They just couldn’t resist all that virtually-no-interest loan money from the banks. That $6 trillion figure is up from $2 trillion outstanding at the time of the last financial crisis. While corporate debt might not be the primary blast that topples the economy, it carries the potential to be a massive secondary explosion. Remember what happened in 2008 when companies laid off workers in droves, hundreds of thousands lost their jobs every month and corporations engaged in deleveraging to pay down debt.
Imagine what would happen if there was a spark that tipped the U.S. economy into a slowdown. Today corporations owe three times what they did in 2008, and the devastating layoffs would be swift and deep. Many of the people getting layoff notices will be under a huge load of student loan debt that they’re unable to discharge in bankruptcy court. At least during the housing crisis distressed homeowners could walk away from their homes. In the next crisis, young workers have no escape from student loan debt.
It’s true the $1.4 trillion in student loan debt pales in comparison to the nearly $14 trillion in mortgage loan debt on the books before the real estate market collapsed. But add corporate debt to the equation and we’re up to nearly $8 trillion. While that number is still not as bad as the worst economic meltdown in our lifetimes, it’s close enough to be massively uncomfortable if there’s a triggering event that weakens the broader economy.
While we all collectively look away, just for a second, at the presidential election, other risks to the economy are growing. This is the time to take a cue from wealthy investors and skim profits from paper investments and shift them into tangible assets. If the economy runs over a cliff while we’re all distracted with the election, you’ll need those assets to get you through the meltdown.