U.S. Household Debt Burden Declines; First Time in 50 Years

by Eric Ames

Yes, that headline is correct. U.S. household debt actually decreased in the third quarter of 2008—the first time it has happened since the measurement started being tracked in 1952, according to The Wall Street Journal. While I knew that Americans have a grand propensity to spend freely, I certainly did not know that we have increased our debt load every quarter of every year for over 50 years.

Depending on one’s perspective, this news could be considered wonderful or a complete disaster. On the one side it is great to see Americans finally taking control over their ridiculous debt burdens, but on the other hand the economy desperately needs people to start spending again. Our economy is built on the willingness of consumers to borrow in order to finance the purchase of goods and services. If Americans keep this new found conservative nature, the economy is going to be in for a rough ride, and a serious adjustment period.

Along with decreasing debt loads, Americans are also saving more. Economists are projecting a savings rate between 3 and 5 percent in 2009 according to The Wall Street Journal, a far cry from the negative savings rates to which we have become accustomed to in the U.S.

With people less willing to take on new debt to purchase goods and services—and those with money less willing to spend it—the economy will have difficulty rebounding. A majority of the nation’s GDP is generated from consumer spending, so you can bet that the GDP numbers will suffer whenever that consumer spending drops. Until the consumer regains the desire to spend, we are going to be hard-pressed to exit this recession, barring huge government spending of course.

While this news could be viewed negatively, I prefer to look at it in a positive light. It is simply unsustainable for us to continue increasing our debt loads as a way of growing the economy. This strategy is doomed to failure, because it can only succeed if credit is infinite. At some point, though, consumers have to hit their credit limit and the party will end. That time has come for many people thanks to the credit crisis, but even those who can still borrow are increasingly aware that it may not be the best option.

The best way to have a sustainable, consumer-driven economy is to base spending on income and savings, not the use of debt. If we can’t afford something, then we shouldn’t buy it. It’s really that simple. For those visual learners here is a classic clip from Saturday Night Live that pretty much sums up the point:

Comments

[Billy Ford:]

Great blog...I couldnt agree more with you. I believe this hole will be very hard to crawl out of, and earnings growth rates to slow way down in the future, but greed is a nasty thing, and I doubt corporations or the majority of american people will learn anything from this. Once things turn back around and there is confidence in the air...here comes the credit cards

Jan 08 08:53 AM

[donzelion:]

"On the one side it is great to see Americans finally taking control over their ridiculous debt burdens..."

Hmmm, we have a rise in the personal savings rate, but with a crash in gasoline prices, that doesn't necessarily signify increased frugality.

You also might want to read some of Elizabeth Warren's work. Though the article cites her with approval, it misses a few major points: she found that most bankruptcies resulted not from spendthrift ways, but from health crises, personal crises (divorce), or other matters that aren't exactly outgrowths of spendthrift ways.

If she's right, then a drop in household debt might be better explained by people who are in pain who defer treatment...

Jan 08 10:22 AM

[Kunst:]

In 2009, the federal government is projected to run a $1.2 trillion deficit, which goes straight onto our national debt. $1.2 trillion divided by a population of 300 million is $4000 per person. Let's add that into the equation. We may be saving today, but tomorrow's payback is going to be much higher.

Jan 08 01:05 PM

[axelrod608:]

>> "While this news could be viewed negatively, I prefer to look at it in a positive light." >> >> "it is great to see Americans finally taking control " >>

Taking one number, like outstanding debt, and dividing it by another number, like the number of American households give a resultant number - average indebtedness. But the measure is meaningless unless one looks at WHY it changed from earlier periods.

To what degree did bankruptcy chargeoffs lower the debt ? How much in credit card debt chargeoffs ? How many people applied for more debt and were turned down ? How much debt was transferred by creditors to their non-performing portfolio of accounts in structured payoff plans ?

Until and unless you know why the number changed, your conclusion is more than optimistic, it is unjustified. Statistics are only numbers until tested for significance. The devil is in the details. I'm just guessing here, but I suspect the drop in the number you reported has little or nothing to do with people "taking control". External financial circumstance are mandating a whole lot of changes that people are NOT choosing to make.

Jan 08 04:29 PM