Consumer Debt May Sink the Economy

January 13, 2004

The Federal Reserve says American consumer debt as of November 2003 is now two trillion dollars and is rising. This debt includes short and intermediate term credit to individuals including car loans. It excludes loans secured by real estate such as mortgages. If you include those loans, the total debt would come to nine trillion dollars.

The two trillion figure represents a doubling of personal debt in ten years. The one trillion dollar mark was met in December 1994.

Sixty percent of all American families have consumer debt and pay on average $1,700 a year in finance charges, and has a balance of about $9,000. Forty percent pay off their balance each month, and if you spread the total debt just over those with balances the true household indebtedness would be about $13,000

Forty million Americans are one or two paychecks "from the street" and has 10 credit cards they can't payoff.  Yet, a whopping 78 percent of all Americans are considered credit worthy!  Twenty-five years ago, persons most likely given credit were those most likely to pay it off. Now the definition of a good customer is one who never pays off the loan and just pays the minimum monthly payment.  Personal income and financial stability no longer matter.

The average consumer believes it is financially acceptable  to buy unaffordable items simply because they can do so with a credit card. The credit card is now considered a right and loan companies agree. Their tantalizing offers and aggressive marketing lure millions into debt and there is no let up in sight.

Poor households, and those headed by one parent tend to be heavier borrowers. Unfortunately they are least able to pay back their debt. But lenders don’t care, they just want the minimum because it makes them more money that way. Besides, the interest rates can be raised on the remaining customer base to pay for their losses.

Along with our rising debt, it is not surprising that personal bankruptcies are at an all time high of 1.6 million up from 1.5 million in 2001.

Instead of modifying their spending, governments can overspend and raise taxes or print more money. An individual cannot readily increase their income so personal debt is a way to make up the difference.

Our debt today dwarfs the stock market bubble of the 1990s which caused trillions in losses and a recession. Our giant debt bubble is now reaching the tipping point where the national economy will begin to implode under the weight of our personal debt.

The debt crisis will have some additional consequences such as higher interest rates which will stall future growth, lower standard living for most citizens, deferred retirement for most, and more divorces since many marriages end because of financial pressures. Of course, personal bankruptcies will continue to grow.

Financially solvent and sane citizens will have to pay the bill and financial institutions will sit back and count their profits.

What's worse, the average citizen will never learn.