Are we drowning in debt?
Source: NY Fed
You might think so, to listen to the news. Student loans total over a trillion dollars. Mortgage debt is headed higher. Total household debt, which peaked at just over $12 trillion in 2007, now totals more than $13 trillion. We’ve never had so much debt in the economy, and most folks struggle to pay their bills at one time or another.
But debt doesn’t exist in a vacuum. There are two sides to every balance sheet – the consumer who borrows, and the bank (or finance company) who lends the money. They wouldn’t be extending credit if they didn’t think that the borrowers could pay that money back. Yes, consumers owe more money than ever before, but we make more money than ever before. It’s not how much we owe; it’s how much of our income is consumed by what we owe.
Source: St. Louis Fed
According to the Federal Reserve, we spend a lower percentage now on debt service than any time in the last 30 years – less than 10%.
This may reflect a problem with too much aggregation. After all, it’s not very meaningful to say that Jeff Bezos and I have a combined net worth of over $100 billion. Rising income inequality may mask debt problems at the lower end of the income distribution. But the number of delinquent loans is also falling, particularly mortgages and home equity loans that are past due. And mortgages make up over two-thirds of our household borrowings. The level of student loan debt and credit card debt is pretty modest in comparison.
Source: New York Fed
There may be some areas where the US economy is be borrowing too much. Government spending comes to mind, for example. But consumer debt isn’t an issue, right now, and that’s good news for banks and other providers of credit.
So, don’t listen to the “gloom crew” when they tell you that consumers in the US are swimming in a sea of red ink. That’s old news, the kind of scary story we told the kids on Halloween over a decade ago. Household balance sheets are, in fact, pretty healthy. But you won’t read about this on a hot web site. Good news just doesn’t generate that many clicks.
Douglas R. Tengdin, CFA
Charter Trust Company
“The Best Trust Company in New England”