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August 25, 2018

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Personal Debt in America Set to Pass Pre-Recession Levels

March 5, 2017

Total household and non-household debt in America is projected to be at a new all-time high. As of December 31, 2016 the total debt stood at $12.58 trillion and was increasing at a rate of about $2.5 billion per day. The all-time high of $12.67 trillion was during the 3rd quarter of 2008 and played a major role in the great recession. Using the $2.5 billion per day increase in total debt (equal to every adult in America adding $10 of credit card debt each day), America should have recently reached a new high near the end of February. We won’t know for sure until the Federal Reserve releases their Q1 2017 report sometime in May, but given the promises of Trump to increase income, there’s little doubt that Americans have slowed their borrowing from their future selves.

 

Given the fact that the prior all-time high in debt contributed to the great recession should we be worried about a new recession any day now? Not necessarily. Though the total debt is projected to be at record levels there may not be cause for concern quite yet. There are several reasons that this high is a little different than the one almost nine years ago. Let’s take a look at a few of them.

 

1 - The number of people who are potentially contributing to this debt has increased. In 2008 there were roughly 230 million people in the United States aged 18 or older while in 2017 there is an estimated 252 million people. Since the total debt figure we’re talking about is an aggregate number, if we break it down per adult we’re still far from the per person debt back in 2008. If we simply take the total debt and divide by the number of people aged 18 or older we find that in 2008 there was about $55k of debt per person while in 2017 there is just under $50k. Although the debt per person is increasing, we’re still far from hitting the 2008 peak numbers.

 

2 - People are earning more. Since nominal wages tend to rise over time it isn’t a matter of simply comparing two numbers to see which is higher. Comparing only the total 2008 figure to the total 2017 figure would be like comparing apples and oranges. Because the total debt figures are not inflation adjusted we must also take average wages over the two time periods into account. Using the Social Security Index of Wages I determined that in 2008 the average income per individual was $41,335, but this figure increased 23% to $51,028 (projected) in 2017. Using only the changes in wages earned, the total debt today would have to be over $15 trillion to top the 2008 record number; a number we aren’t even close to yet.

 

3 - Interest rates are lower for today’s total debt than back in 2008. Although the total debt may seem like it’s larger today, the fact that average interest rates (mainly mortgage) are lower today significantly decreases the amount people owe on a monthly basis. Since it will be a person’s ability to repay a loan which will determine if the average person is too indebted, and not the total amount borrowed, we can at least reason that today’s debt isn’t as bad as it once was.

 

After analyzing the numbers released by the Federal Reserve Bank of New York I’m confident that, although the total debt in the USA may be higher than pre-recession levels, this debt shouldn’t yet throw the country into another recession. That doesn’t mean that there aren’t problems stemming from this debt.

 

An Alarming Fact

 

If we dig into the numbers we do find some very alarming facts. One that truly sticks out is the amount of student loans in America and the rate at which it’s increasing. In 2003, during my freshman year at college, there was a total of $240 billion of student debt in America. This number has grown to $1.31 trillion in 2016, an increase of 450% in just 13 years. Sure, inflation has played a minor role. If we take our $240 billion starting point and apply the inflation during this time period the debt should have accumulated to $313 billion in 2016. More students are also taking out loans for college. But $1.3 trillion? That’s just ridiculous. Take a look at the chart below to see how student loans have grown as a percentage of total non-household debt held by Americans.

 

 

 

At the start of 2004 student loans were an afterthought in the debt world. Since then they have grown to be the second largest player in the game of debt. Unfortunately this trend doesn’t seem to be slowing either as costs for higher education continue to soar. If nothing comes along to slow this debt then it truly is possible that there could be a student loan bubble in the not so distant future. Student loans already account for the highest delinquency rate of all major debt products by a substantial margin. As this debt increases the delinquency rate will (most likely) only continue to rise. Not to mention that we’re currently in a thriving economy which is firing on all cylinders. If an economic downturn happens within the next several years, coupled with higher unemployment, the student loan delinquency rate could surely skyrocket, sending the economy into an even worse tailspin. Below is a chart published by the New York Fed. Notice how the student loans are becoming more and more difficult for Americans to repay than in the past.

 

Do you think student debt is getting out of hand? If so, what do you think could be done to fix it?

 

 

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