Debt Happy

Finance and economic nerds love charts…we have charts for everything. While most are boring and useless, the following are ones that are incredibly interesting and tell an important story. The first graph shows “Total Revolving (Consumer) Credit” from 1968 to April of 2010. Have a look.

“Revolving Consumer Credit” what’s that? Think of it as the collective amount of credit debt we as individuals have in the U.S. (not mortgages folks, but just credit based debt). In light of that explanation and viewing the chart, I hope you realize just how “debt happy” we (as Americans) are. We’ve gone from an era where the only debt people had was a mortgage and NO credit debt, to an era where we not only have mortgages, but almost 1 Trillion dollars in revolving credit debt – all in the span of 40 years! That is truly scary.

Have a look at the next chart: “Household Credit Market Debt Outstanding” from 1953 to 2010. This chart represents the collective amount of debt we as individuals in the U.S. This includes mortgages and revolving consumer credit from above. Think the revolving consumer credit number was shocking? Have a look at the graph…almost 14 Trillion dollars in debt! For perspective that’s just about the same amount as the U.S. federal deficit. Wow.

Now, what’s amazing to me is reflected in both charts around mid 2009. That’s when the trend line GOES DOWN for the first time in 40 years! Nothing like a good financial crisis and global recession to wake people up, eh?!?! Had it not gone down, we’d most likely be past the 1 Trillion mark for revolving consumer credit and past 14 Trillion for household debt!

Consider this. There are four ways to reduce debt burdens:

1. By paying down debts via accumulated savings (which the decrease in the trend line reflects).
2. By inflating away the value of money (this would be the result of “the Fed” a.k.a., Federal Reserve Bank, making changes to policies that cause inflation – hasn’t happened yet and not what they want to do as a first resort).
3. By reneging in part or full on the promise to repay by defaulting (going into bankruptcy, for example – some do this, but it’s not a fun, easy, or pain-free fix).
4. By reneging in part on the promise to repay through debt forgiveness (Think this will happen in a capitalistic society? Not!).

Here’s the BIG question: what do you think will happen to these trend lines once we “come out of the crisis/recession/economic downturn?

I submit to you that they will go back up. People come to their senses in bad times and get serious, yet when the good times return they forget the hardships and fall back into bad habits and an anesthetized existence. Proverbs 26:11 sums it up best and I submit to you for your consideration: “Like a dog that returns to his vomit is a fool who repeats his folly.”