Household Debt Has Gallen to 2006 Levels, But Not Because We've Grown More Frugal
Josh Sanburn, Time Magazine, 19 October 2012 (hat tip: Big Picture)
U.S. household debt has finally fallen back to pre-recession levels. So, we’ve finally learned our lesson about spending more than we make, right? Well, not really. The real reason our debt has dipped is that so many Americans defaulted on bills they couldn’t pay...
Well at least we are doing better. We are now at the same level we were in 2006 (11 trillion), which is still well into the housing bubble years, and I am scared to think what level we need to be at to get back to the pre-Vietnam War debt bubble - which granted was mostly government debt.In fact, says Mustafa Akcay, an economist at Moody’s, “nearly 80% of deleveraging is caused by defaults.” Only 20% of the decrease comes as a result of what he calls “voluntary deleveraging,” i.e. the hard work of paying down our debts faster than we borrow.
8 comments:
That's what happens in a depression....
But I don't think we need to go back to pre-Vietnam War levels... I think 1980 levels will do just fine... heck, they can even be adjusted for inflation... although that probably is the best case scenario.
John: Obviously people default on loan in a depression. But prices also are supposed to go down. It was the collapse in farm good prices that crushed the depression era farmers. Certain asset classes (homes) and non-critical production goods (digital entertainment) may be going down in price, but food and oil are not. In the case of oil, it is not appreciably going down even with reduced usage. Only natural gas is going down, but a one comany bubble (Chesapeake) seems to have been driving a lot of that.
Great posting! Thanks for sharing something like this. It is really important to get out of debt. Because being in debt is really stressful. And I guess going back to the pre-recession debt level is quite promising already.
Jelly: Pre-recession levels were still very high debt levels.
Thanks for sharing this news, Russell1200. Though the word “recession” is commonly associated with drastic drop in GDP, surprisingly, there are some benefits that it can give us as well such as increased supply of money by the government; decreased taxation; and opportunities in the extended open-market policies.
Jaden Allred
Jaden: Your 'benefits' are part of the basis of Austrian-style economics.
It’s good that the level has gone back up to pre-recession status, but it’s sad that people are still borrowing and spending willy-nilly, and that people were considered more financially-conscious before the recession. Myself, I’m just glad I’m not in debt or having problems with my finances, although it may be a looming problem with us buying a house on the suburbs in the near future.
Paddon+Yorke
Allan: The last financially conscious cohort (there are always individuals) were probably the group that grew up in the Great Depression. And I am not so sure about them. Easy consumer finance (generally installment plans) was available in the 1920s, and obviously after the war. The spread of the credit card has simply brought it to the level of insanity.
A rising economy can make a lot of foolish behavior look like "investing".
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