Important Lessons We Can Learn
Kamil Homsi
Founder/CEO Single Family Office - Macroeconomics, Capital Markets, Board Member, Alternative Investments, CRE, Renewable Energy, Waste Management, Net Zero Carbon, ESG & Measurable Impact Advocate
Americans like to spend money, even if they don't have it. From 2006 - 2019 our median household income grew by 1.07x, but was outpaced by household debt which grew 1.25x.
If you take a look at the chart, you can see that during that same period, while US GDP (blue) rose 1.55x, government debt (green) grew 2.7x and non-financial corporate debt (yellow) grew by 2x.
The result has been $14 trillion in US household debt, $23 trillion in government debt (and growing!), and over $10 trillion in non-financial corporate debt. It’s a house of cards waiting to fall.
Since 1950, the average prime lending rate was 6.6%. Yet our children have grown up in a world where debt has been drastically cheaper than that. The result has been an entire society that is over-leveraged.
What lessons can we learn?
A government bailout (more debt) may postpone a total economic meltdown but it also digs a deeper hole for all of us in the long term.
At some point this over-leveraging has to face a major reckoning and borrowing will be restricted. Interest rates will eventually have to rise.
How do we fix this?
- Live simpler, borrow less, pay off your debts.
- If you really need refinancing, do it while rates are still somewhat low.
- Retool and retrain into jobs that are in demand regardless of a recession - but don’t rack up student debt.
- Position businesses (especially startups) to carefully manage risk, build core revenues instead of speculative growth, and be ready for the needs of a post-Covid world.
- Buy local and support American workers.
- Identify new opportunities. One of the best times to think about starting a business or pivoting an existing business into a new opportunity is in a recession. Create a hardy company!
- Invest carefully and always calculate your risk.
- Push through the pain and endure. Recessions are painful but they are temporary corrections.
- No matter your losses, you still have your knowledge and experience. You will be able to build again.
Many Americans were vulnerable before this crisis, and they are already suffering. Unlike previous recessions, this one is also stealing our health, our access to community supports, and our social connections.
One of the hardest and most painful parts of any loss is peering over the edge of a cliff knowing you are going to fall. You will wince and brace for a horrible impact. But when you are finally at the bottom, you can breathe, look up, and start climbing. You are still alive. That is where the great adventure begins.
Enjoy the journey.
- Kamil Homsi
* This is part one of a series about debt, the economy, and investing in our current world. Stay tuned to learn more about risks, opportunities, and advice for navigating recessions, stagflation, and market volatility.
Owner, Sarah Lynn Sportswear, Inc.
4 年It is amazing how many Americans are living paycheck to paycheck.
Private Dealer, Fine Rugs and Tapestries at Nemati Collection
4 年As usual, Kamil is saying a lot with few words. My father, who spent decades selling to the economic elite always said that recessions are a time for the truly wealthy to take a few months to confirm that they are indeed wealthy, before resuming their spending. The next level, the aspirational consumer, was kicked down by the last recession and never fully recovered, although many have tried to keep their lifestyle going with debt--That will have to stop now! What I really worry about are the working families of the so-called (and shrinking) middle class family where one partner's income is what pays for housing and crushing tax burden we must deal with in the New York area. Now that at least one of them will be out of work, probably for at least a year, what happens to our social fabric, depression rates, etc. Kamil is pointing the way for the entrepreneurial minded amounts us to come out of this in better shape. Thank you and keep up the good work.
Real Estate Advisor
4 年Good article however American economy based on consumption.
Independent Real Estate Professional
4 年Excellent article and excellent and valuable advices in " How do we fix this?" section. Thank You Kamil and looking forward to read the upcoming articles of the series about debt, the economy, and investing in our current world.
Mr. Homsi, you are spot on and I think everyone should read this article to re-calibrate themselves. I read it with your voice speaking the words and it hit home - just as your words of wisdom always do! Thank you.