"Household debt rose from 96 percent of personal disposable income (consumers' take-home, spendable cash) in 2000 to 111 percent in 2003 to 113 percent at the end of 2004." Just the fact that it's growing isn't necessarily a problem," says Scott Fullwiler, an economics professor at Wartburg College in Waverly, Iowa. "My concern is that as a percentage of disposable income, it's at an all-time high."
Consumer debt of all sorts--from home mortgages to credit card balances--has shot up. In 2000, average household credit card balances stood at $7,842, according to Cardweb.com. That figure rose to $8,940 by 2002 and $9,312 last year. "There is an explosion in household debt taking place, and it's a serious problem," says Robert Parks, an economist and finance professor at Pace University's Lubin School of Business.
Chris Viale, chief executive of Cambridge Credit Counseling, says, "Americans are in big trouble right now." He notes that 1 in 4 households is either behind on card payments or over the credit limit on at least one account."
Wages have been stagnant for the last 5 years. According to the Bureau of Labor Statistics, the average earnings increase from 2000-2004 was 3.86%, 3.22%, 3.12%, 1.71% and 2.39% respectively. However wages have to be compared to inflation to determine the real rate of wage growth. For the same years, annual inflation was 3.4%, 2.8%, 1.6%, 2.3% and 2.7% respectively. When inflation is subtracted from wages, overall wage growth becomes .46%, .42%, 1.52%, -.59% and-.31% respectively for 2000-2004.
Consumers are using debt to maintain their standard of living. Thanks to the Republicans explosive use of debt at the national level - they have added 5.1 trillion dollars to the national debt over the last 25 years - consumers think being in debt up to your eyeballs is a good thing, even condoned by the charge and spend mentality of Republican economic theory. As a result, being in debt is a good thing, and being submerged in debt is encouraged.
While interest rates are low, these incredibly high-debt levels are manageable. Many people are also growing their asset base while incurring debt, essentially acting in a manner similar to a start-up business.
"Thanks to still-low interest rates, it doesn't cost Americans as much to finance debt as it did in the 1990s. In 2001, for example, debt payments represented only 18.3 percent of disposable income. Today, the percentage has barely budged, to 18.45.
Even though the savings rate is down, the total dollar amount of savings in deposit accounts has actually grown more than 50 percent to $4.4 trillion since 1999.
Rising assets. That, plus the increased value of real-estate holdings, helps explain why household net worth is thriving as debt is growing. According to the Fed, the net worth of households and nonprofit organizations grew 8.2 percent over the past year and more than 15 percent since 1999, before the bear market in stocks launched an assault on assets."
However:
"...could consumers cope if rates rose? Some rates have been increasing since the Fed started tightening monetary policy in June 2004. In fact, the average credit card interest rate is nearing 17 percent, up from 15.7 percent in the past year. In the hottest housing markets, adjustable-rate loans account for over half of all new mortgages, according to Merrill Lynch. Millions could face higher monthly housing payments as rates rise, says Bert Whitehead, president of Cambridge Connection, a financial planning firm in Franklin, Mich."
At some point, rising interest rates and high levels of debt will become a problem. I have no idea when that point will occur, but it definitely will. And the new bankruptcy laws will create a culture of consumers who are nothing more than indentured servants to the big credit card companies.
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