Consumer debt crunch and division by two

Jordan Hayes jmhayes at
Mon Jun 8 12:36:15 PDT 1998

I think the expansion of consumer debt reflects a few trends:

* Easier access to credit * Increasing sophistication of household finances * Changing core values about debt

The first, obviously, has it's roots in the realization that even as bankruptcy rates rise, transaction fees and interest payments are outpacing other commercial lending opportnities. Default is "merely" a cost of doing business. Increasing sophistication in credit scoring is (finally) erasing some (unfounded) boundries. So it's not surprising to see the 'average' debt load go up; many people who never had access to credit now do. I think a more important number to look at is per-card balances, though this is also cloudy since many people have multiple cards that they never use.

The second one I think has to do with people realizing that easy credit terms allow a jump in household durables for only the cost of carry. This is something that businesses have been doing forever, but to see the process of getting a new big-screen TV as "get, then pay" instead of "save, then get" decreases the time needed for an increase in standard of living.

Finally, I think people have taken on new ideas about the role of debt in household finances. There's less stigma in buying things on credit; it used to be that there were many who said "If I don't have the money for it, I don't need it" -- but typically the largest piece of the household is a mortgage. The thing I don't buy is the idea that there's a train-wreck coming because people are using all this debt for day-to-day household expenses. When these people get tapped out of credit access, they stop buying durables; they stop advancing their standard of living. So this could have an impact on the stock market, but typically not on the functioning of the household.

Rakesh asks:

> Is income paid off to creditors counted as savings?

Oh no, not this question again! :-)

No, the savings rate is simply income minus expenses. Debt service is indeed an expense.


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