The Myth That Consumers are Drowning in Debt
In my last blog, I showed that average credit card debt was much less than the ballyhooed number of $9,300 per household. Many researchers (Elizabeth Warren, Economic Policy Institute, and Center for American Progress to name a few) cite the growth of debt in relation to disposable income -- rising from 74 percent of income in 1979 to 132 percent in 2005 -- as proof that consumer debt has reached unsustainable levels.
While it this sounds like a scary number, there are three reasons why it is not.
First, when comparing debt to incomes, averages are used. Since wealth and debt are very unequally distributed, the differences between average and median are very large in this area. Of those with debt in 2004, the average level was $103,000 while the median was half that level at $55,000. But 24 percent of households had no debt of any kind in 2004. When this group is included, the average debt of all households was $79,000 and the median was $22,000.
That's right, according to the best data source that we have on wealth and debt (the Survey of Consumer Finances), the median level of debt including mortgages of all households was just $22,000. This means that the ratio of median debt to median income was about 50 percent and not the 130 percent cited.
Second, virtually the entire rise in indebtedness was due to mortgage debt (which rose from 46 to 96 percent of the income in the gross figures). This is particularly true in the last 15 years when mortgage debt rose faster than overall debt. Mortgage debt is not considered as frightening as other forms of debt because it is backed with asset, and the alternative to not having a mortgage is paying rent.
Third, debt should really be compared with assets and not income. The accompanying figure tracks the evolution of median debt, net worth, and total assets from 1989 through 2004. Even though debt at the median grew by 150 percent, median net worth (assets minus debts) was 35 percent higher because asset values grew by a greater amount.
Are there some people who have been crushed by their debt? Sure. But the key question is how many. In the past 15 years, "financial innovations" have made high-cost credit more available to high-risk borrowers. This guarantees that a larger number of people will have to declare bankruptcies. But the broader measures of debt problems -- payments out of income, share of households with debt payments over 40 percent of income, and share of households with at least one payment over 60 days late -- are only up one to three percentage points since 1989.
The 2004 wealth survey also found that 11 percent of 50-year-olds had ever declared for bankruptcy protection n their lifetime. So, it would appear that, like many other issues, the drowning in debt story reflects the conditions of the bottom 20 percent of the population and not the population as a whole.
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I disagree. We now have a society in which debt is incurred even under the age of 18, but certainly becomes a lifetime burden once a person reaches adulthood. If you include the ultra-rich, then of course the overall "average" debt doesn't look that bad. But it also skews the numbers and presents a distorted finding.
The post-war baby boom, for example, was encouraged to go to college back when we still believed in creating a better world for all our people. This included very low tuition and various forms of low-interest financial aide. No more. Nowadays students are routinely expected to incur tens of thousands of dollars in debt just to get through college, without even thinking about the cost of graduate school.
Yes, people always had mortgages. But back in 1960 the average home cost about 4 times the gross earnings of a 1-earner household. Today the cost is more likely 10-12 times the gross earnings of a 2-earner household. Which means the mortgage will never be paid off, 50% of the take-home goes directly to the housing expense, and if someone loses a job, they are at risk of becoming homeless.
And of course the politicians have been bribed by financial corporations to provide an exemption from the usury laws, so credit card companies, the main "lender" for most people, are free to charge up to 50% per year interest on their "loans," an amount which means they've taken over the business of the loansharks.
Yeah, sure, things are just great in modern America. If you're in the upper 20%. But for everyone else, it's looking pretty bleak.
A recent Zogby Poll pointed out tangentially that the only reason why the bottom 50% of the economic population still constitutes 25% of the consumption, despite the fact they receive only 12.8% of the national income, is one of the miracles of Bushonomics – i.e., continuous expansion and negative debt-financed consumption, that is, the ability to continuously borrow more money through a Fed-inspired, cheap and easy money policy, and through expansion in financial products that have, as we’ve seen under Bushonomics II.
This has allowed citizens to borrow all of the equity and then some from their homes, for instance, which they have been allowed to use as checkbooks or ATMs. Indeed, the bottom 50% of the population has done this.
By 2006, for instance, 14% of all consumption that was being generated from the bottom 50% of the economic class of the nation was coming from citizens using their homes like checkbooks.
Also the regime has adopted a twofold policy towards debt and bankruptcy. It has changed the laws, as we’ve written about in the past, as in 2005, making bankruptcy more difficult, but at the same time it encouraged business and industry to be more flexible in debt extension -- in so-called work-out programs.
Now we see a record percentage of the bottom 50% of the economic population in a work-out deal -- one out of every 6 credit card holders, in fact, is in a payment work-out program. In other words, one out of every 6 credit card holders within the bottom 50% of the economic population has at least one credit card account that they are on a work-out situation with.
Nothing to see here folks, EVERYTHING is fine. Honest.
when it comes to credit, as the subprime mortgage episode has taught us, credit compounds when it is good but it deflates when it is bad. it only takes a small default ratio to create big problems.
76% are carrying 100% of the debt. How does that not increase the debt density.
So mortgages made up most of the debt. And debt should be compared to assets. Let's compare the mortgage debt to the $800,000 house which was bought in 2004. What banker is going to refi a loan if the collateral asset has depreciated (national average 14%) and is at risk to devalue further.
Close to $1 trillion in variable rate mortgages will reset next year starting suddenly in January. Let's take a look at filings then.
What is the bottom 20%?
in income?
in assets?
in brains?
Or is it the people who used Home Equity lines of credit to offload their credit cards, have huge jumps in mortgage payments. and that which they have been borrowing on is worth less that the debt incurred.
Something isn't adding up but I can't put my finger on it. How about a comparison of debt to income for most people? With stagnating and/or dropping wages, income is NOT increasing and staying out of debt means using savings. Many people may not have debt, or very little, but how long can that last when thier cost of living is outpacing thier income?
I don't see using home mortgages as very valid since many markets have been way overvalued and people have leveraged from that. You can't really calculate this issue because the housing market has only just begun to adjust. But many people will suddenly have a lot more debt because thier home is no longer worth what they leveraged on it.
Stephen,
Even using average household debt, a household of three would only have an average personal debt of $70,000 but a $99,000 share of the national debt.
Seems like the area that we have the real problem is the national deficit.
The resulting trend is not good. The last six years, of Republican administration, has increased the average houshold's share of the national debt from $55,000(3x$18,000) to $99,000(3x$33,000).
Regards
" ... debt story reflects the conditions of the bottom 20 percent of the population ..."
So you figured out that those that don't have the funds cannot pay back their debts.
Wow.
Brilliant analysis.
We in the middle class are not drowning in debt, as long as we have kept our tastes in proportion to our pocketbooks, but the waters are lapping at our balls nonetheless.
There are lies, damn lies, and statistics.
"The accompanying figure"? Did I miss something?
It seems to me that your analysis has a lot of holes in it. The most worrisome is your assertion that asset values have grown so much that they compensate for the large debt growth. But, isn't that part of the problem? The assets (real estate in particular) seem overvalued now and destined for a fall. People have taken on significant mortage debt based on appraisals at the peak of the price cycle. Historically, hasn't over blown real estate debt been an economy buster for just that reason?
As with your last blog, a question arises regarding 'consumer debt'. Has the amount of 'credit card' debt been offset by the 'home equity' option?
As you state debt is probably more relevent to assests than income, but what happens with the usually reliable asset, home ownership, faulters?
Is the fact that eleven percent of Americans over fifty having declared bankruptcy a good thing? Perhaps in business bankruptcy is a matter of course but to private citizens I thnk there is still a negative stigma associated with failling to meet owns obligations.
Something about your word being your bond.
It ONLY affects the bottom 20% of the population. Well that's a relief.
There was a politician that used to say "figures don't lie, but liars figure!"
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