Monday, May 23, 2016

IOU

When I heard that average household debt in the US was over $90,000, I went on line to find out some of the details.  I found that the $90,000 number was the amount owed spread out over all households.  Considering that about 30% are debt-free, that means only the households that are in debt owe an average of over $130,000, an even more surprising number.

This personal debt includes student loans, mortgages, credit cards and auto loans.  Now averages are tricky and summing averages does not necessarily represent reality, but such a large debt while we hear constant reports of stagnant income for the middle class is still a matter for concern.

While I was looking for the details, I ran across this article about a similar problem in Australia.  Their “household debt has skyrocketed to 185 per cent of disposable income and continues to soar.”  They blame the problem on a combination of “ill-considered public policies and lifestyle and investment choices of individual households.”  Driving these personal spending and investment choices are artificially low interest rates and other government policies and programs that discourage savings and encourage borrowing.

The article predicts that in less than five years the household debt bubble will burst leading to widespread economic hardship for those who have incurred unsustainable levels of personal debt.  As a remedy to avoid the crisis, they recommend that the Australian central bank, analogous to the Fed in the US, raise interest rates to discourage borrowing.  This will cause some short-term pain, but will avoid a likely major economic upheaval if behaviors don’t change.

This story of Australia and the urgency with which it was written made me curious about the corresponding number for the US.  I found an estimate of the household annual disposable income for the US of $41,355.  If this is, in fact, the same calculation, the average household debt in the US is not 185 per cent of disposable income – it’s almost 220 per cent!


Should we be as panicked as the Australians?  I’m not sure.  But it seems to be at least a wake-up call about personal borrowing and spending.  Overspending is a discipline issue and the consequences, whatever they are, will catch up sooner or later.

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