Tuesday, September 21, 2010

Americans May Not Really Be Paying Down Consumer Debt

While it may appear on the surface that Americans are deleveraging from consumer debt, a closer look reveals that this may not be the case. Any decline in consumer debt may be more due to defaults than actual belt tightening. See the following post from The Mess That Greenspan Made.

Well, so much for the idea that Americans are voluntarily shedding their debt and abandoning their spendthrift ways as part of a cultural shift toward a new, more responsible and frugal lifestyle. According to this story at the Wall Street Journal over the weekend, the massive reduction in outstanding credit over the last few years has been due to charge offs, not consumers digging their way out of debt by paying down their balances.

U.S. consumers might not be quite as virtuous as they seem.

The sharp decline in U.S. household debt over the past couple years has conjured up images of people across the country tightening their belts in order to pay down their mortgages and credit-card balances. A closer look, though, suggests a different picture: Some are defaulting, while the rest aren’t making much of a dent in their debts at all.

They note that, for those borrowers who have not defaulted, today’s freakishly low interest rates may have encouraged even more borrowing and even higher levels of debt, to some degree at least, offsetting the reduction in debt that millions of Americans have embarked upon after realizing that, in the wake of the burst housing and credit bubbles, “more prosperity through more debt” doesn’t work so well over the long run.

This post has been republished from Tim Iacono's blog, The Mess That Greenspan Made.

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