America’s growing debt mountain in 5 charts

• There is a storm of private and public debt problems headed for the market.
• Warning signs have surfaced in the form of rising credit card balances, payment defaults, and other indicators.
• Here are the signs that the US is struggling with debt-related problems.

A storm of public and private debt is brewing in the US – and the problems are already showing on the surface as credit mounts and borrower confidence dwindles.

Broadly speaking, Fitch Ratings’ US credit rating downgrade and Moody’s downgrade of 10 US banks this summer point to problems for both US sovereign debt (political polarization affecting the US’s ability to meet its debt obligations) and towards debt originating from the banking sector (structural pressures due to tighter credit conditions and Fed policy).

But more detailed problems are also piling up in debt markets, as both the private and public sectors face a very different environment from the previous decade, when interest rates were at historic lows following the 2008 crisis. If low interest rates fueled the sugar rush of high borrowing, rising interest rates could set the stage for the sugar crash.

This was evident earlier this year when Silicon Valley Bank imploded, the result of mismanagement of its balance sheet, which was strained by a bond portfolio that rapidly depreciated in value as interest rates rose. SVB, Signature Bank and First Republic all fell in quick succession.

The fallout from this event was relatively small, but that hasn’t stopped market pundits and investment icons from sounding the alarm about high levels of debt at a time of rising interest rates. Hedge fund legend Ray Dalio and top economist Nouriel Roubini, among others, warn of a full-blown debt crisis.

Here are five charts that point to the red flags that are emerging in US debt markets.

1. Private debt is increasing rapidly

Private debt is increasing rapidly and will reach new records this year. According to the Federal Reserve, credit card debt has surpassed $1 trillion for the first time ever.

DataTrek Research

Unsecured personal loans also hit a new record, reaching an unprecedented $225 billion in 2023, according to TransUnion. The same is true for corporate bonds, which according to Janus Henderson, grew 6.2% last year to $7.8 trillion.

The national debt picture looks even worse. The national debt balance surpassed $32 trillion for the first time this year, with a potential addition of $5 billion a day over the next decade, according to Bank of America data.

Federal Reserve

2. Corporate defaults are increasing

As interest rates rise, companies are beginning to buckle under their debt burdens, with the number of US corporate defaults in 2023 already exceeding the prior year total. 55 U.S. firms defaulted on their debt in the first six months of the year — a 53% increase from the 36 companies that defaulted in 2022, data from Moody’s Investors Service shows.

As much as $1 trillion in corporate debt could default if the U.S. faces a full-blown recession, strategists at Bank of America have warned, though the bank no longer thinks a 2023 recession is likely.

3. Late payments are increasing

More and more people and companies are falling behind on their loan payments.

In the commercial real estate sector, the proportion of commercial real estate owners who were 30 days or more in arrears or already in default on their mortgages rose to 3% in the first quarter of this year, according to data from Mortgage Bankers, an association that reverses an already existing downward trend. This is reflected in the rising number of defaults on loans backing commercial mortgage bonds, which have increased this year.

Association of Mortgage Banks

Meanwhile, the default rate for all personal loans rose to 2.23% in the first quarter of this year, compared to just 1.7% in the first quarter of 2021, Fed data show.

Federal Reserve

4. Banks want to dump risky debt

Banks are already looking to offload loans that carry a higher risk of default, even if it means selling those assets at a discount. JPMorgan, Goldman Sachs and Capital One are among those on Wall Street trying to dump large commercial real estate assets, Bloomberg reported this week.

As financing conditions tighten, banks are also pulling out of the debt business altogether. That spells trouble for the commercial real estate industry, as there is roughly $1.5 trillion in CRE debt maturing in the coming years that will need to be refinanced.

Homeowners could face difficulties refinancing their mortgages as interest rates are higher and property valuations have fallen. A wave of commercial mortgage defaults may be looming, according to some savvy investors, and banks have already begun to scale back lending after a series of bank failures earlier this year sparked a brief banking crisis.

Earlier in the year, Morgan Stanley noted that the credit crunch had arrived as banks experienced their sharpest contraction in lending on record.

Federal Reserve