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The Backdrop for BROKE: Consumer Debt Then and Now

posted by Katie Porter

In the introductory chapter of the book, Broke: How Debt Bankrupts the Middle ClassI present some data about consumer debt levels in the United States. As Bob Lawless and others have shown, levels of consumer debt are strongly correlated with bankruptcy filings. While conditions such as unemployment, rising health care costs, and skyrocketing college tuition--and recessions--all create pressures on consumers that lead to borrow, debt is the sine qua non of bankruptcy--the relief offered by the system is the reduction or elimination of debt--not the promise of a good paying job or a strong social safety net. Because bankruptcy is driven by debt, those filings help reveal whether the levels of consumer debt will create serious problems for the economy and American families.

In Broke, I present a figure, courtesy of the San Francisco Fed, that shows the dramatic growth in household debt in real dollars over the last few decades. Reproduced below, the figure shows that the sharp acceleration began in the mid 1980s. E-letter_figure_8 Figure1This is an important point to understanding why recovery is proving difficult from the recession. As I explain in the book, "The consumer debt overhang, however, began long before the financial crisis and the recession. Exhortations about subprime mortgages reflect only a relatively minor piece of a much broader recalibration in the balance sheets of middle-class families. . . . The boom in borrowing spans social classes, racial and ethnic groups, sexes and generations." Broke, pp 4-5. The gray bands on Figure show recessions; this recovery is more difficult, at least in part, because we have an unprecedented gap between income and debt. Is this gap disappearing as a consequence of consumer reluctance to borrower and tightened credit conditions?

Since the recession, borrowing has slowed. This seems to have lead some commentators to suggest that consumer debt is back to a "normal" or "safe" level. A piece in the Wall Street Journal suggested that because the debt-service ratio, debt payments as a share of after-tax income, is at its lowest level since 1994, that "the things that worry Wall Street might not be so worrisome for Main Street." The perspective that I offer in Broke is much less cheery. Overall consumer debt only declined about 8% from its peak in 2008, and the newest data suggest that consumer debt has stopped declining (see here for a comprehensive look), and may even be starting to climb. (see here re credit card balances). Consumer debt remains very high by historical standards, meaning that bankruptcy may be ebbing in the very short-term but bankruptcy, and the debt-driven financial distress that it evidences, are certainly are not problems of the past.

You can read the a page proof version of the chapter here at the Stanford University Press website.

 

Comments

You have a lot going on in that post and the embedded links, far beyond my ability to digest in a short period. I only want to note one thing: when you write, "Reproduced below, the figure shows that the sharp acceleration began in the mid 1980s." I don't think, as best as I can tell from the graph, that that is accurate. As I see the graph, the liftoff starts in the mid to late 1970s, then Volcker's interest rate policies depress the curve for three years, but then it lifts off again. Were you to extend the curve from 1979 at its prior slope, i.e. eliminating the Volcker suppression, it looks to me like it would get to the same place in the mid 1980's.

One should also be careful about comparing a stock (debt) to a flow (disposable annual income).

IMHO the causes of this phenomenon were: the shift from gold-backed money to pure fiat paper and then digital money which made the financial system far more productive in terms of the output of loans it could generate; the computerization of transaction documentation which had the same effect; elimination of usury laws and other deregulation of credit; political use of mortgage loan carrots and sticks to support elected officials' quest for re-election; the enormous buildup of retirement savings, which have to be invested in something; the proliferation of securitization which enabled the transformation of household debt into AAA rated securities that could be owned by money market funds and other savings vehicles; a political compromise to use loans, rather than outright income transfers (and rather than nothing at all) to fulfill and stimulate consumption demands; declines of, and restrictions on, manufacturing which stimulated states to look for alternative sources of business growth.

And we don't have a 'reset' button.
With continuing economic pressure from outside the country, from an increasing competitive world, American workers are unlikely to be seeing any real wage/salary increases into the indefinite future.
The tax and tax like burdens on American workers are likely to increase due to budgetary problems at all govt levels and to the increasing financial burden of a medical system gone totally awry.
All would suggest that economic strength gained from consumer spending will come, when it comes, in small bursts, blow offs after periods of consumer imposed fiscal discipline, always followed quickly by renewed fiscal discipline.
And/or bursts of spending because of some fiscal or monetary move intended to achieve exactly that, and always temporary in their duration because of the underlying economic realities.
And no reset button.
Ouch.
David.

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  • As a public service, the University of Illinois College of Law operates Bankr-L, an e-mail list on which bankruptcy professionals can exchange information. Bankr-L is administered by one of the Credit Slips bloggers, Professor Robert M. Lawless of the University of Illinois. Although Bankr-L is a free service, membership is limited only to persons with a professional connection to the bankruptcy field (e.g., lawyer, accountant, academic, judge). To request a subscription on Bankr-L, click here to visit the page for the list and then click on the link for "Subscribe." After completing the information there, please also send an e-mail to Professor Lawless (rlawless@illinois.edu) with a short description of your professional connection to bankruptcy. A link to a URL with a professional bio or other identifying information would be great.

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