This is a variation of a chart I like to show, via Visual Economics:

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click for larger graphic

Category: Credit

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

36 Responses to “Rise of Consumer Debt”

  1. TDL says:

    It would be interesting to know the demographic changes of debt holders over this time period as well. I would imagine that those that had credit cards back 1968 were relatively wealthy.

    Regards,
    TDL

  2. Mannwich says:

    But, hey, workers don’t need no stinkin’ raises when there’s free money to be had. What? That has to be paid back? Now you tell me.

    But there’s been no inflation during “The Great Moderation”. No sireee bobby. None at all. Unless you count things inconsequential things like food, health care, education, energy, homes, etc.

  3. farmera1 says:

    Mannwich you obviously don’t understand the important concept of “CORE INFLATION”. Not only that you have no understanding of hedonistic adjustments and beyond that when hamburger gets too high, people can buy dog food. (Don’t laugh at the idea of humans eating dog food. I used to work for a major dog food manufacturer and we knew some 30% of our product went to human consumption.)

    Also I recall reading a FED paper that basically said if wages aren’t going up there is no inflation. Interesting take on economics and the idea that humans are what count. No siree, as long as wages aren’t going up, which they haven’t for a decade or so there is no inflation problem. Never mind all of the costs of energy and food etc.

    But isn’t consumer credit dropping in recent months? Also the graph above seems to equate consumer debt with credit card debt. I would think these two things are different.

  4. rootless_cosmopolitan says:

    However, the charts apparently stops at the end of 2008. And the projections seem to be an extrapolation of the trend until then. So it is missing some essential change, the contraction of consumer credit throughout 2009:

    http://research.stlouisfed.org/fred2/series/TOTALSL?cid=49

    So, how is it going to turn out? Will there be a return to a path of reflating and further expansion of the credit bubble, or continuing deleveraging? The economy over the last three decades has been dependent on exponential credit expansion. Private credit about doubled every ten years. Will there be another doubling of household and business debt over the next ten years from 25 trillion to 50 trillion US-dollars as fuel for economic growth? What if this doesn’t happen, because there is a saturation with debt? How will future economic growth be fueled, instead?

    rc

  5. ashpelham2 says:

    As I always say; big ticket items have gotten cheaper, sure. Things like cars (thanks to giveaway rebating and cash for clunkers), homes (who’s prices may resume their slide now), and televisions/big appliances. But we don’t buy any of those things all that often do we? What we do buy, and virtually cannot live without, are groceries, gasoline/diesel (because even Priuses have gotta have a little fuel in the tank), health insurance, utility bills, etc, etc, etc. have done nothing but go up, and in many cases, DRAMATICALLY.

    Yes, inflation is alive and well, and it’s hitting everyone, not just the rich, not just the poor. Everyone’s cost of doing business has increased, yet we can’t ask as much for our goods and services because the chinese will do it cheaper.

  6. the bohemian says:

    hey Barry-

    all cash now? I am certain your stops kicked in-

    keep us posted- lol

  7. km4 says:

    I have zero credit card debt ;)

  8. rustum says:

    Any one following this story.
    http://rawstory.com/2010/01/grayson/

    Senator from Exxon/ Walamart looks like a interesting story.

  9. lalaland says:

    Of course there is a gun to the american consumers head: credit ratings. If you want a mortgage, a cell phone, sometimes even a freaking job in this country you need a high credit score. Want to rent an apartment in NYC without good credit? Good luck.

    what are the ramifications of living in a society where debt is mandatory?

  10. the bohemian says:

    lalaland-

    think those standards go out the window-

    we saw how those AAA ratings worked out for MBS

  11. bonzo says:

    Stupid chart. CPI-U is 216 now versus 153 in 1995. So $5,800 then is $8,150 now. If you believe CPI-U is understated (lots of idiots in this forum do), then $5,800 would be even higher. And population is larger (go find the stats yourself). Basically, consumer credit has been growing since 1995, but not explosively like the chart shows. Also, you need to use logarithmic charts for something that involves compounding. A straight line on a non-logarithmic chart (like the one above) indicates the rate of growth is slowing.

  12. Rikky says:

    what does in debt mean anyway? how long is this balance being carried? i use my credit card for everything to rack up cash back and frequent flyer miles and always pay it off every month. am i showing up in this statistic? probably.

  13. scepticus says:

    quite so bonzo.

    and all the while that graph has gone up-n-to-the-right interest rates have been going down till now when they are at zero-ish.

    its what happens when the (global) need to save exceeds real economy growth. Asset prices and consumer credit get bloated so as to accomodate the rapacious desire for monetary yield.

    All totally self defeating because the yield for the prudent folks ain’t there and the more they look for it the further it recedes and despite all the tail chasing they still moan that the prudent are getting stiffed.

  14. scepticus says:

    “what are the ramifications of living in a society where debt is mandatory?”

    a cashless economy

  15. mathman says:

    To this article:

    once most consumers “tap out” from paying taxes, unaffordable healthcare, “utility” bills (where did the utilities go? – they all seem to be private companies now), food, rent/mortgage, and old loans (Sallie Mae is the mobster no one talks about) while trying to keep afloat on little to no significant raises in salaries (if they’re lucky enough to still have jobs) people will either stop using these cards for anything but emergencies or default on them and many other expenses. The only other option is to work more (which would be great if there were jobs that paid more than minimum wage). Depression looms.

    to rustum:

    yeah i’ve been all over the place looking at reactions from many sources (Jonathan Turley on Olbermann, Dailykos, Digby, and various business blogs) – most see it as further corrupting the democratic process, but some actually defend this as “free speech” for corporations. i’m for publicly funded elections for any and all candidates to air their views on the issues and for having some workable version of run-off elections to winnow them down to the final two. We have to get corporations, religious zealots, lobbyists, and special interest groups out of politics somehow. The trouble is that by now the system is so corrupted that it would be near impossible to fix it. (What ever happened to “one person/one vote”?)

  16. Mannwich says:

    @willid3: That has to be a parody. There’s no way that’s serious. Can’t be.

  17. Mannwich says:

    That is a great site though. Defintely Onion-esque.

  18. Pat G. says:

    Not to sound sanctimonious because I’ve been there too but when you’re spending more than your net disposable income this is the problem you encounter. But hey most governmental agencies around the world do that, continually.

  19. Winston Munn says:

    In a healthy economy, supply is roughly equivalent to demand. As productivity rises (increasing supply), demand should move in lockstep (as higher wages) to absorb the excess. This is the equalibrium that keeps a healthy economy in balance.

    Funny thing, though, with the movement of Randian ideologues like Alan Greenspan into positions of influence, higher productivity was not rewarded with higher wages. The excess was absorbed instead by new debt. Rising debt minus a compensatory rise in wages to service the debt led to crisis.

    All this debt trick accomplished was to hide the decline of living standards. The only way to restore equalibrium is for wages to rise or prices to fall.

  20. willid3 says:

    Winston Munn, i think your are correct, but the chances of incomes rising is nil (globalization has put paid to any chance of that), and nobody in the real business community will or wants to lower prices. so we end up with declining jobs and incomes both, and business will be desperate for any potential customers as they become fewer and fewer

  21. willid3 says:

    how banks work the short version?
    http://brontecapital.blogspot.com/

  22. Bernie X says:

    Very pretty chart, but very incomplete data that reveals almost nothing.

    What is the ratio of consumer debt/ consumer income ? Has it risen ? Declined ?

    What would an OPTIMAL consumer debt/ consumer income ratio be ?
    (Some debt is good, student loans, car, house. Debt in and of itself is not bad.)

  23. drocto says:

    The metrics on this chart are all misleading, because none are properly normalized.

    1) The graph: This is ‘debt’ of ‘households with cards’. The footnote is unclear whether this is real (adjusted for inflation) – maybe the footnote only applies to the total debt number, not the graph? Even if it were ‘real, a more meaningful presentation would divide the nominal debt by nominal household income. Better than taking median debt and dividing by median income would be to take the individual debt/income ratios of a representative sample and present the median of that. That would be much more informative. (Also, we are not entirely clear on what is included or excluded in the debt.)

    2) The total credit card debt: This should be divided by nominal GDP or another nominal income measure. It would still show huge growth. However, it’s better to show total debt, not just credit card debt. (That is, unless it’s a ‘real’ number, which is unclear from the footnote.)

    3) Households with credit cards. First, it’s kind of a “so what” statistic. Secondly, it should be divided by number of U.S. households.

    Overall I give this graphic a “D”. It conveys some useful information but is unclear about a key consideration and is likely to be misleading.

  24. drocto says:

    bonzo,

    You make two good points, however if one were to implement your first suggestion (make it ‘real’) then perhaps a log chart isn’t needed, since we would not expect growth over time and there is no expected underlying CAGR. That is, unless we are looking to see how real debt changes with real income, in which case a log chart is still the call (and should be presented along with real income).

    If it is not made ‘real’ or normalized for income, then indeed your suggestion for a log presentation is on target.

    Your final note that a straight line on this chart indicates slower compound growth is a key observation.

  25. the bohemian says:

    “Some debt is good, student loans, car, house. Debt in and of itself is not bad”

    wrong dipshit- better to pay cash for all these things- if possible. Student loans- tell that to the waitress trying to pay off her student loans for her 4 year degree. A car- better to scrape up as much as you can and pay cash so there is no monthly payment-

    no debts = freedom

    but keep thinking like a chump

  26. drey says:

    Bohemian -

    You’re being a bit harsh there, dude. Debt may or may not be a good thing and personally I prefer to have little or none, but a moderate amount of debt is no problemo. Most people can’t afford to pay cash for a house – does this mean they shouldn’t buy one? They should give up the mortgage interest write-off and a chance for serious appreciation (all while using someone else’s money) and pay rent for the rest of their lives? Please…as long as you don’t get in over your head it’s a sweet deal, and when a lot of people do it it totally greases the economy…

    I once financed a pickup truck at 1.9% – could have paid cash but left my dough in the mm earning 6-7% instead. Does that make me a chump?

  27. Bernie X says:

    Bohemian –

    So you’re saying people shouldn’t become pharmacists, or engineers, or even mechanics because student loans are “bad” ?

    You’re saying that a family that’s in immediate need of a safe, reliable, economic car should wait because car loans are “bad” ?

    You’re saying a family whose refrigerator has just broke should wait because credit cards are “bad” ?

    You’re saying a person should not fly cross-country on short notice for a family funeral because credit cards are “bad” ?

    You’re saying a family should not take the opportunity in this current market and buy a well-built house in a decent area for a price they’ll never again see in their life because mortgages are “bad” ?

    Every “chump” that has accumulated wealth through real estate or incorporation has done it with debt.
    Every “chump” on the Forbes 1000 has intelligently used debt to get there.

    So yes, I WILL keep thinking like those “chumps”.

  28. arinnk01 says:

    Sadly, more and more people will be sucked into the debt rat race. Understanding how debt is created is crucial to eradicating it.

  29. the bohemian says:

    drey-

    no doubt- if getting an offer for zero or very low interest- AND you still have the ability to pay off in cash- perfect sense-

    a house- sure- a mortgage is usually necessary- but the USG subsidy in the form of interest write off should be the last reason someone takes out a mortgage- talk about a government give away- that subsidy won’t necessarily be there forever- secondly- to buy a house for appreciation purposes- I guess many folks got trapped into that thinking this very decade- didn’t work out too well- but hey- maybe if they stay in there homes the next 10 or 20 years they’ll be back to even-

    Bernie-

    sorry dude- was a bit harsh- but-

    yes- car loans are bad- if as drey says- you can finance BUT still pay in cash if desired- maybe- if not- then someone is indebting themselves for a depreciating asset- better to scrape up cash for a cheap car then to finance a nicer car-

    student loans- possibly- if someone has no other means-and they have a GREAT desire to go to college- me- I worked my way through college- finance degree- ZERO debt when I got out- many people wander into college with no idea why they are there and take out loans and get out of school w/ huge debt hanging over their head’s with the HOPE that they may be able to pay it off- not a smart plan-

    I’ve met many a lawyer type w/ over $100,000 in student loans who can barely keep their heads above water trying to pay off the debts- especially sad if you decide that being an attorney isn’t your bag-

    and lastly- your refrigerator breaks and you have ZERO cash to buy a new one- I have no sympathy- maybe if a person did not have a large mortgage and car payment they would have a little money set aside to pay for things that break- which happens when you own a home-

    but if they want to finance it at 20+% interest on a credit card- perfect-

    banks love people like that- the very same people working a jobs they hate because they have to pay their debts- and they have chained themselves to the car and home and the job and anything else they had to have and financed-

    just another aside- its funny you mention a refrigerator- mine did break recently- 20 years old- looked at some new ones- decided they were too expensive- found one on Craig’s List for $100- talked her down to $75- picked it myself and it works great-

    and to finance a refrigerator- wow- there is an asset that is worth almost nothing the moment you buy it and move it into your home- don’t believe me- look at Craig’s List under refrigerators- many almost new ones for chump change

  30. cognos says:

    Bernie X – Thanks. Great posts.

    Growing “debt” is simply the balance of growing “savings” as we become wealthier. Money does not magically pay interest… it pays interest when it gets loaned to someone. All that money we all have in our checking account is recycled into uses for others.

    I borrowed ~200k to go to graduate school. I paid it off in 2-yrs. I have twice been in consumer debt >100k, once when I started a business. Both worked out great as risk taking paid off much bigger than my small debts. Of course, sometimes this doesnt work… but thats why interest rates are higher for debt than for US Treasuries. If we expected zero losses, we would all pay treasury rates.

    Now we recently had a BIG problem… because of a major bubble in housing and a concentration of debt, equity, and skills in an overbuilt housing sector. Real estate is highly leveraged, so the collapsed caused a major kink in the workings of the normal financial system. But that is over now. It wont happen again for 20-100 yrs. Back to work everyone, nothing to see here.

    Humans and capitalists are prone to speculative bubbles (most are far less bad than real-estate)… so I would be looking for the next one. Iphone apps? Clean tech, energy tech, biofuels? BlueFin ranching?

  31. the bohemian says:

    nothing like the next bubble- right cognos?

    and your terminology is suspect- when you say-

    “I have twice been in consumer debt >100k, once when I started a business”

    so . . .a business loan? I have zero problem with that- but if you leveraged up a credit card to finance a business . . .i.e. consumer debt- then you really aren’t very bright are you?

  32. cognos says:

    Hmm… I disagree. I dont know any bright entrepreneur who would deal with a bank for a “business loan” and I dont suspect it would actually work out as great businesses these days are intellectual businesses — they have no hard assets. Banks are geared to hard asset lending.

    One individual is my wider circle is a high-tech, software entreprenur. A little more than 10-yrs ago he was in extensive credit card debt as he self-financed the first 12-18 months of his own software company. Today he is roughly a billionaire based on those efforts.

    And the NBER statistics probably count him as a “negative saver”.

  33. the bohemian says:

    “One individual is my wider circle is a high-tech, software entreprenur. A little more than 10-yrs ago he was in extensive credit card debt as he self-financed the first 12-18 months of his own software company. Today he is roughly a billionaire based on those efforts.”

    whew- beyond stupid- but I guess if it didn’t turn out he could always file bankruptcy-

    right cognos?

  34. constantnormal says:

    Barry, here’s a much better chart that addresses all the deficiencies noted in the comments …

    http://www.economagic.com/em-cgi/charter.exe/var/togdp-consumercreditoutstanding+1947+2009+0+1+0+290+545++0

    No range limiting that avoids the most recent decline, or the distortions of population and economic activity built into the topic’s info-graphic by not making this a per-capita chart or a per-GDP chart.

    In addition, it allows one to see the gradual rise of true consumer credit use from the 40′s to the 60′s (back in the day, the use of a credit card was restricted to the very wealthy — there was to real “Consumer credit”). And I think one can also pick out the innovation of the HELOC, and even fit the real estate bubble into the picture as well.

    One can easily imagine a de-leveraging process that returns the relationship of consumer credit to the GDP to the 12-13% regime, occurring between now and the end of this decade.

  35. Greg0658 says:

    debt is the fuel of our market engine just like gasoline in our cars
    interest rates can kick start or kill the economy .. see what it did for the banks
    I’m not an economy scholar but the 10:1 ratio thing did seem to work for a long time
    but when one of those 10 turned into another 10 with nothing real to back it up .. that imo is the mess