U.S. Household Debt: A Frightening Picture

Here is a frightening graphic from the FT on consumer debt levels:

Graphic courtesy of the Financial Times.

In 1990 consumer debt was at 60% of GDP (60% of a smaller GDP at that), in 2000 the number was around 70% and eight years later we're above 100%. 

Not much to say really, other than that something has to change or calamity will ensue; furthermore, retailers used to consumers living above their means could be in for a rude awakening.

The graphic comes from a larger discussion around changing consumer behaviors towards debt (keeping credits and giving up on the house), which you can find here.

Comments

[johnny a:]

Sorry, but what the world needs is more debt. With over a billion people going into world retirement controlled debt expansion is the only way to handle the situation.

2008 Aug 26 08:24 AM

[pockyclips ...:]

Whatever happened to saving for retirement? That, or else the New World Order folks are working on a final solution for senior citizens.

2008 Aug 26 09:02 AM

[guido:]

This is among the scariest things I seen lately, combine it with destruction of wealth (home values, stock market declines, auto residuals) and shrinking state and municipal revenues and you begin to see the formation of the perfect storm.

2008 Aug 26 12:12 PM

[User 68127:]

You may be correct, but how do you know what is the "right" level of debt? Just because it is higher than before does not mean debt is too high now.

Many people have mortgages that are much higher than 100% of their annual income, and yet they can service them comfortably. Why is debt at 100% of GDP too high?

Also, shouldn't we consider net worth rather than just debt? Why exclude the assets and only focus on the debt? Isn't it the total picture that really determines ability to service debt?

Last I heard the net worth of U.S. households was around $55 trillion, which would be about 4x GDP and about 4x household debt.

So, again, you may be correct, but your analysis is incomplete.

2008 Aug 26 12:41 PM

[guido:]

your correct in that the analysis is incomplete, there are numerous other forces at play, however, I don't believe consumer debt has ever reached 100% of GDP, total serious delinquencies (90 days or more past due) is twice the level of 2005, credit spreads for the financial sector is currently 400bps versus 75 bps as recently as December 2007 and between now any year end 2009 almost $900 billion of financial institutions debt matures. Overall reates may be low but there spreads are huge. Big price tag there, also when the fed acts on fannie and freddie the $30 billion held by US financial sector will require an additional writedown, further distruction of value. Energy costs are not going to stay low and the consumer can't carry the burden. Our largest industries housing, autos and airlines are all on the ropes. BTW JPMorgan Chase just announced that the are writing down GSE preferred positions. The American consumer has always been able to consume us throuigh downturns, they are not going to ba able to repeat that behavior.

2008 Aug 26 01:49 PM

[Markham Lee:]

It wasn't meant to be a complete analysis per se, just a quick "hey look at this" a complete analysis would have to include net worth, wealth distribution, debt distribution, note the rate of increase of debt vs. wealth, etc, etc.

However the fact that in the last 8 years total household debt has increased by 50% can't be a good thing in my opinion, especially when you consider that debt is more of a problem for the bottom 90-95% than the top 5-10%.

-M

2008 Aug 26 02:23 PM

[whidbey:]

The post is likely correct in just orders of magnitude, if not specific or average cases. What is alarming is the aggregate debt, its cost and the capacity of the average household to service the debt. The net worth of the consumer sector in the US is inflated grossly, but what we care about is consumer capacity to service their debt AND continue to consume. It is not one or the other, but both that must happen, or the economy will enter a recession/depression. Alarming? Will consider that the EU, and Russia may be in about the same boat.

2008 Aug 26 06:58 PM

[David Martin:]

Determining what level of debt is 'too high' is really not that difficult - delinquency rates do that for you.
House prices used to be based on a multiple of 3 times the main earner's salary, and have now been inflated to 6 times both earner's!
It doesn't take a genius to figure out that when times got tough then in the past the second person in the house, usually the woman, would try to get a job and hopefully the family could struggle through.
Now if one person looses their job, that's the end of the road - and unemployment has not really begun to hit yet - it will do.
As for debt being minor compared to assets, that is dependent on two factors, the still greatly inflated house prices, and the fact that most of the other assets are owned by the top 2% or so of the population, who have been greatly enriched by their ponzi schemes and the increased debt leverage.
The whole scheme to impoverish the middle class whilst enriching the few is approaching it's denouement.
If it is any consolation the position in Britain is worse.

2008 Aug 27 09:15 AM

[viva:]

It seems to me that the comparison should be with the value of assets in the hands of consumers - not tied to sales. I have a large amount of "consumer debt" on a couple of credit cards, but solely because they offered long term rate committments at 1.99% which allowed me to trade down from an average of 8% which allowed me to invest for 13 percent. But of course, not everyone knows how to use other people's money to make money. Many are mortgaging their equity to buy depreciating assets or finance expenses. Pitiful situation to be sure.

2008 Aug 27 09:20 AM

[Still Renting:]

Over the last several years I have been saddened to see houses in middle to lower middle class neighborhoods (where most own their homes) being surrounded by motorhomes, jet skis, big Harleys and new BMW's, all the time knowing that when the pyramid scheme ends, these entire neighborhoods are going to be in trouble.

It is unfolding before my eyes, and it appears to be worldwide. It looks more and more like 1929 - 1932.

And you know what that got us a decade later.

2008 Aug 27 10:09 AM

[Richard Men...:]

It shouldn't be all that surprising. Median real incomes have declined pretty steadily in the U.S. since 1973, and so people are trying to keep up both by working longer hours and by borrowing. This is particularly true in education, where the cost of educating your kids has gone up far faster than the overall CPI, and in health care, where we not only have the well-recognized problem of the uninsured, but an increasing problem with people who are uninsured. Empirical studies have shown that over the last 10 years or more, more than half of personal bankruptcy cases have been filed because of health care emergencies. The real crisis is not one of profligate borrowing, but of unavoidable expenses growing faster than median incomes.

2008 Aug 27 01:46 PM

[Jason Rines...:]

That is a correct analysis Richard but health care can and must be reformed and I am not speaking of nationalizing it either. There was $34 B in Medicaid and Medicaire fraud in 2007. I speculate that half of it is from 'immigrants' or what they were called and should always be called: ILLEGAL ALIENS. Once the fraud has finally been investigated and shut down as an important first step, the next one is to negotiate drug discounts with big pharma. Negotiate means the government offers something of value to big pharma, ya know simple things like the ability to retain patients through loyalty programs. Negotiate does NOT MEAN TELL. And that is exactly what the House Democrats tried to do in 2006, like they are talking about doing with big oil. Go the Dennis Hastert route. And no, not getting into political crap and shilling. Both parties have failed miserably in the last decade. Truly a Cerberus animal now, couple of heads with big fangs and one ugly dog.

2008 Aug 27 07:45 PM

[AvlGuy:]

Markham is sniffing up the right tree, as is David Martin. I would suggets that debt as a % of HHI be parsed via HHI quartiles at the very least, perhaps in even more detail.

And with credit card debt, we need to stop using 'average' credit card balances for all HH. Instead, we need to break the data 'snapshot' into 2 groups, those that carried a balance during the time period in question, and those that did not.
We need to assess the size of each group (i heard up to 40% of our 166 million HH dont carry a balance). Then we need to focus on the group that carries a balance and see what that the 'median' balance is. It would be great to also see what the median i-rates were. I suspect that the median credit card balance for the perhaps 100 million HHs that carry a balance is so much higher than the average balance for all HH, that it's strangling them and rendering them irrelevant to a recovery.
Any economic recovery based on consumer spending may have to be built on the balance-free HH, and their numbers may simply not be enuff to do more than keep the recession in a steady-state of existance.

2008 Aug 27 11:45 PM

[AvlGuy:]

User68127, there's good reasons to not give much credence to asset valuations. The dollar amount of the liabilities are fixed amount that are legally enforceable. Any change must be negotiated or handled via bankruptcy filings to be changed. The value of the assets behing those eliabilities are fluctuating freely, and mainly downward for the forseeable future. The cars are worth less daily, and the junk & crap bouight on credit cards or via HELOCs are not even 'e-bay-able' in liquidity. The houses behind the mortgages and HELOC purchases are losing value , but not as fast as the crap purchased via credit cards. 401ks, stocks, mutal funds are down ...and treading water.
But it gets better. While all the liabilities are fixed and unfluctuating, the assets, including homes & securities, would lose much of their $55 trillion valuation if the HHs all tried to liquidate them simultaneously.
That $55 trillion 'ephemeral, floating paper number' wouldnt net much when push came to shove.
Oddly this same Q&A came up twice in readers comments on an article in today's UK Telegraph.

2008 Aug 27 11:57 PM