What To Make Of The Recent Increase In Consumer Debt
The Federal Reserve noted in its latest release of consumer credit data on January 9, 2012 that outstanding consumer debt increased at an annual rate of 10% in November 2011. This represents a substantial spike in a trend of increased consumer debt that began in the fourth quarter of 2010. Total outstanding consumer debt has increased by $84.1 billion over that time.
Many explanations offered for increase in consumer debt
Some economists see this increase in the use of credit as an indication of improved consumer confidence in the economy. Consumers see indications of economic growth and are willing to borrow to spend now in anticipation that the economy will produce the jobs and income necessary to repay the debt in the future.
Other economists are not so certain of this analysis. Household incomes have been declining when adjusted for inflation since 2007. Consequently, there is no justification for the increase in consumer debt. They believe this trend is premature and unsustainable without an increase in household income.
Another explanation for the increased use of consumer credit is that households are using debt pay for day-to-day living expenses to offset stagnant wage growth. Increased borrowing from 401k and other retirement assets is cited as evidence for this conclusion. Another trend supports this idea that credit is being used to pay for living expenses: Fewer Americans with overextended credit are seeking debt relief, credit counseling, or filing for bankruptcy. This may be an indication that some consumers see no hope for their financial future other than to continue to borrow.
I’m sure that some of this increased use of credit is due to pent-up demand. American consumers had been paying down debt for two or more years while hearing that a robust economic recovery was just around the corner. I think many of them got fed up with waiting for better economic conditions. They decided to go ahead and spend a little extra this Christmas to take some of the edge off of the financial sacrifices they had been making.
Others may be indulging in wishful thinking about a stronger economy, because they desperately want to return to the spending habits they enjoyed during the years prior to the Great Recession.
All represent a denial of reality
Whatever the reasons for the increase in outstanding consumer debt, they all have one thing in common, a denial of reality and a sense of entitlement. Consumers expect their financial lives to return to the way they were prior to the Great Recession. They want to go back to spending more than they make and living the illusion of a prosperity they cannot afford. Some have gotten impatient. Some are taking whatever they can get on credit. All must face the reality that those days are over. Our economy will not totally recover from the fallout of this recession for years to come—if ever. A highly leveraged standard of living is a thing of the past.
Live smaller and save
Americans are reluctant to accept that they must roll back their standards of living and downsize their lifestyles to survive in this new economic environment, but that is what they must do and the sooner the better, for them and for the economy.
The way to prosper in a slow-growth economy is to reduce overhead and accumulate savings, not take on more debt to expand an unsustainable standard of living. It means spending less and saving aggressively, so you can eventually make a transition to pay-as-you-go living and enjoy true prosperity.
K.C. Knouse is the author of True Prosperity: Your Guide to a Cash-Based Lifestyle, Double-Dome Publications, 224 pages
