US consumer debt reaches record levels

[Karmadillo]

http://www.wsws.org/articles/2004/jan2004/debt-j15.shtml

US consumer debt has reached staggering levels after more than doubling over the past 10 years. According to the most recent figures from the Federal Reserve Board, consumer debt hit $1.98 trillion in October 2003, up from $1.5 trillion three years ago. This figure, representing credit card and car loan debt, but excluding mortgages, translates into approximately $18,700 per US household.

Outstanding consumer credit, including mortgage and other debt, reached $9.3 trillion in April 2003, representing an increase from $7 trillion in January 2000. The total credit card debt alone stands at $735 billion, with the household card debt of those who carry balances estimated to average $12,000.

The levels of consumer debt have increased as millions of jobs have been destroyed. Unlike past recessions, consumers continued to borrow during the last downturn, which began in March 2001 and officially ended in November 2001. The prime lending rate set by the Federal Reserve is at an historic low, allowing mortgage rates to drop to their lowest recorded levels. The automobile companies, which have offered zero percent financing for the past two years, have begun doing the same for 2004.

According to CNNMoney, consumer spending accounts for some 70 percent of the US gross domestic product. “So the world economy is leveraged to the US consumer. And the US consumer is leveraged to the hilt,” states the web site.

Experts warn that the debt bubble potentially dwarfs the US stock market asset bubble that burst in 2000. Consumer credit and mortgage debt represent a higher percentage of disposable income than ever before. Household debt as a percentage of assets reached the historic high of 22.6 percent in the first quarter of 2003. The Federal Reserve revealed that personal savings dropped to a mere 2 percent of after-tax income in the first half of 2003.

more...

[lovedems]

1. "but the economy is great and growing!"

I am sure these expert liars will find a way to spin this into "great news". People are spending money! They have confidence! Well, apparently they are spending money they don't have, JUST LIKE THE FEDERAL GOVERNMENT!

[ChemEng]

2. Consumer debt will grow as the economy grows....

and a new record will be set pretty much every year. The absolute amount of debt is not as relevant as the ratio of the debt to income. Also, if you are including long-term debt such as mortgages, you need to factor in the interest rate. A lot of difference in servicing a debt at 6% interest versus 12% interest!

[cosmicaug]

3. Consumer debt will grow.

Feminist_man wrote:

Consumer debt will grow as the economy grows and a new record will be set pretty much every year. The absolute amount of debt is not as relevant as the ratio of the debt to income.

True, but take a look at the following quote from http://www.usnews.com/usnews/issue/040112/biztech/12economy.htm :

The average family of four today spends about 21 percent less on clothes, 22 percent less on food, and 44 percent less on appliances--after inflation--than it did a generation ago, according to The Two-Income Trap by Elizabeth Warren and Amelia Warren Tyagi.

If the above is true, it would look suspiciously like a situation in which smaller expenditures are resulting in a higher debt. That would suggest to me that income is probably not really going up an awful lot for these average families which would mean the debt to income ratio is, most likely, going up.

Feminist_man wrote:

Also, if you are including long-term debt such as mortgages, you need to factor in the interest rate. A lot of difference in servicing a debt at 6% interest versus 12% interest!

Also true. So who's the one who's going to be making sure that the interest rates remain this low so as to not inconvenience the debt over-burdened? I guess the question would be whether these low interest rates are maintainable indefinitely.

On Edit: Added a comma.

[jmcgowanjm]

5. the Bind: making sure that the interest rates remain this low

This is where Soros makes his money.

This is what faced (approximately) the Bank of England
w/ % rate/Maastrict Treaty ranges.

The US can't let rates rise w/o crushing the last hopes
of the middle class.

When the US can nolonger generate a supply of
secure investment vehicles sufficiently large to
enable the rest of the world to recycle its annual
$1/2 Trillion current account surplus ...

the next fake terror attack will occur?

[ChemEng]

6. Your US News article....

talks about how people are spending less on clothes, food, and appliances. That means that as a percentage of income, Americans have more disposable income for other things such as larger homes, three or four cars, computers, etc. So I don't quiter follow your statement about income is not going up. Care to explain? Thanks!

[seasat]

4. We're talking about a 32% growth in 3 years.

I don't have to look up inflation to know that the debt growth exceeds it. Income growth throughout this recession has been flat so I'm pretty sure that debt to income ratios have increased. Why do you think we've been seeing record numbers of bankruptcies and foreclosures?

Added on edit: The average consumer also spends much more on health care and housing. Clothing and other cosumables have been kept in check partly by a strong dollar leading to cheap imports. That is coming to an end real soon as the dollar continues to slide.

[ChemEng]

7. The critical factor is how easy is it to service the debt load

Lower interest rates allow for a higher debt load when paying a constant dollar payment. If I had a mortagage of $100,000 at 8% interest for 30 years, then my yearly payment is about $8,880 per year. If I refinance at 6% interest rates, I can increase my debt to $122,000 at the same payment of $8,880 per year. My income didn't go up, my debt did, but I am still even.

So you have to look deeper than just total consumer debt and income.