This morning, Karl sent me a link to a CNN/Money article that is simultaneously happy and sad:
In a sign that Americans’ spending habits are shifting, household debt fell for the first time ever, based on data going back to 1952. According to a Federal Reserve report released Thursday, consumer debt fell an annualized $30 billion, or 0.8% in the third quarter to $13.91 trillion.
Think about that for a moment. In the 56 years that records have been kept, household debt has never declined in this country. Even now, there’s evidence that the current drop may not be due to consumer choice. USA Today writes:
The decline in household debt levels is evidence of the severe credit squeeze that is occurring as banks, saddled by billions of dollars of losses in mortgage debt, have tightened lending standards and made it harder for people to get loans.
In other words, it’s not the borrowers who are cutting back, but the lenders.
Though I’m generally in favor of reduced debt, I do have some questions about these numbers. How much of this is mortgage debt? (From what I can tell, this report considers all household debt as one.) The numbers we’re given are for the entire country. What was the decline per capita? Has there been a per capita decline before?
And since our economy is largely built on leverage, what happens when household debt drops too far? Is our financial system strong enough to survive a few years of decreased spending and increased saving? (And isn’t it crazy that should even be a question?)
There’s been other evidence recently that Americans are actually tightening their belts. After years of declines, the personal savings rate surged during the second quarter of 2008. (Note, however, that the personal saving rate is an imperfect metric. Most people save via 401(k) and IRA, which are not reflected in this number. If you’re curious, you can read more about this thorny issue.)
Also, according to the Bureau of Economic Analysis, actual income and disposable income have held steady over the past couple of months, while personal consumption has dropped slightly.
I understand that numbers and reports like these are merely barometers of complex economic behavior, and that there’s a lot behind them that I don’t understand (as my past rants demonstrate). But I still have to believe that a decline in household debt and an increase in personal saving are good for this country in the long term.
At the very least, these sorts of behaviors are likely good for you and for me, especially when the rest of the United States returns to its profligate ways.
Note: It’s fascinating to watch CNN build their story about household debt. Karl says that when he submitted it to me, there was nothing there. Just a stub leading from the banner I’ve posted in this article. When I first visited, there were a couple of short sentences. Now that I’m nearly finished with the post, they’ve fleshed it out with a bit of opinion and one comment from an expert. By the time this post goes live in a few hours, it may be an actual article! That’s basically how I write a blog post.
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