While the current amount of debt Americans are facing is staggering, the economy continues to grow at a fairly steady pace. This is because most of this debt is consumer debt that is mainly used for consumption rather than to invest in assets. Debt used to invest in something like a home or a business provides good value over a long period of time. This type of debt fuels the economy, allowing more products and services to be created. It creates new jobs and provides benefits to consumers.
Consumption debt, on the other hand, is used for things such as clothing or food. Many may assume that this type of debt would also help grow the economy because it means consumers are making purchases, but they are making those purchases on credit, not in cash. This means the consumers are simply borrowing money from the lenders (usually a credit card company) to pay for their purchases. The consumer is not truly paying for the purchases themselves.
Generally, consumption debt is gained by those who do not make enough money to live the lifestyle they want. This can actually negatively impact the economy because these consumers may find that they do not have the money to cover all of their debts. If another recession were to occur, these consumers may find themselves losing their homes or vehicles, and they will not have access to as much credit with which to replace any lost income.
This article was provided by our partners at moneytips.com