Wednesday, January 7, 2009

U.S. Household Debt Declines For The First Time

Yes, that headline is correct. U.S. household debt actually decreased in the third quarter of 2008—the first time it has happened since the measurement started being tracked in 1952, according to The Wall Street Journal. While I knew that Americans have a grand propensity to spend freely, I certainly did not know that we have increased our debt load ever quarter of every year for over 50 years. Depending on one’s perspective, this news could be considered wonderful or a complete disaster. On the one side it is great to see Americans finally taking control over their ridiculous debt burdens, but on the other hand the economy desperately needs people to start spending again. Our economy is built on the willingness of consumers to borrow in order to finance the purchase of goods and services. If Americans keep this new found conservative nature, the economy is going to be in for a rough ride, and a serious adjustment period.

Along with decreasing debt loads, Americans are also saving more. Economists are projecting a savings rate between 3 and 5 percent in 2009 according to The Wall Street Journal, a far cry from the negative savings rates to which we have become accustomed to in the U.S. With people less willing to take on new debt to purchase goods and services—and those with money less willing to spend it—the economy will have difficulty rebounding. A majority of the nation’s GDP is generated from consumer spending, so you can bet that the GDP numbers will suffer whenever that consumer spending drops. Until the consumer regains the desire to spend, we are going to be hard-pressed to exit this recession, barring huge government spending of course.

While this news could be viewed negatively, I prefer to look at it in a positive light. It is simply unsustainable for us to continue increasing our debt loads as a way of growing the economy. This strategy is doomed to failure, because it can only succeed if credit is infinite. At some point, though, consumers have to hit their credit limit and the party will end. That time has come for many people thanks to the credit crisis, but even those who can still borrow are increasingly aware that it may not be the best option. The best way to have a sustainable, consumer-driven economy is to base spending on income and savings, not the use of debt. If we can’t afford something, then we shouldn’t buy it. It’s really that simple. For those visual learners here is a classic clip from Saturday night live that pretty much sums the point up:

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