Consumer Debt and Austerity
Consumer debt on credit cards is in freefall, plunging to levels we haven’t seen in more than eight years. There’s no news better than this news.
Austerity Has Never Had More Merit
The American people are making their statements with their bank accounts (and in some cases, their mouths) that they’re enacting their own personal austerity measures. In the past year, the average combined American credit card debt fell 13%. Considering that most credit cards have interest rates at 15%, Americans went to work sending more than a quarter of their total balance back to the credit card companies. That is very, very, good news.
But these personal austerity measures should only be met with austerity at all levels particularly in federal spending where Americans have virtually no say in where their money is allocated. What good is it to reduce credit card debt by 13% only to counter it with greater increases in federal debt? The federal debt is a burden to everyone, and it can’t be said that Americans are at all happy about how their money is being spent.
Economists have worried for quite some time that austerity measures would cripple the economy. If we reduced spending, the consumption economy would collapse, they claim. But what they don’t realize is that spending is all relative—even with stimulus the consumption economy is collapsing. Americans are saving and reducing debt, not consuming and borrowing. That is the best sign we’ve seen in quite some time.
Let the Trend Continue
A continuance of this trend for many more years could be an incredible boon for the long term economic outlook. While it is rare to see such great shifts in consumer spending and debt levels to sustain themselves even through boom years, it appears as though we have broken the cycle. Savings and frugality are back in vogue.
If this trend continues, the average American won’t have a dime in credit card debt in less than two years. By year three, the savings rate should continue to trudge even higher. Recent numbers reveal that Americans are saving a whopping 6.4% of their take home pay. That is excellent! That is capital that can be invested, not credit or debt.
After the savings rate stays positive for the long term, the trade deficit should be naturally corrected as savers work to keep money inside the US border and the federal deficit will be negated by greater personal wealth among the middle class.
These are amazing times we’re seeing. All that doom and gloom we keep hearing about is just the system flushing debt. Once we rid ourselves of personal debt, the savings rate should grow exponentially, and with it the economy should grow too. I’m excited, and you should be too. But we still have a long way to go.
