For the First Time, American Debt Shrinks
|December 15, 2008||Posted by Roshawn Watson under Uncategorized|
According to third quarter Federal Reserve’s flow of funds report, American debt has decreased for the first time. This comes in tandem with plummeting net worth of American households due mainly to declining home values.
American debt fell by $30 billion dollars in the third quarter to $13.91 trillion.
Debt Decline Not Entirely Voluntary
While it is true that consumers are spending and financing less, this change is not entirely voluntary. For example, we previously reported that credit cards were tightening credit worthiness criteria. Well, it is having a huge impact of the availability of credit. Auto dealers across the country have cited inability to obtain financing as a frequent reason for declining auto sales. Additionally, over the past few months interest rates have also shot up significantly, prompting consumers to borrow less to avoid carrying expensive credit balances.
The predominant contributors to the decrease in American household debt is that more than a million Americans have lost their homes to foreclosure since the housing crisis hit in August 2007. This means, their debts (remaining balance on the home) were transferred from them to the bank. Home mortgage debt decreased by 2.4% in the third quarter.
In addition to tougher credit lending criteria and foreclosures, the dramatic loss of nearly 2 million US jobs this year decreased the availability of dollars to spend. Since the gross domestic product is about 70% dependent on consumer spending, this represents a huge blow to the economy overall. Also, unemployment and underemployment make it more difficult to acquire credit for purchases, even if it is for necessities.
Collective Tightening of Belts
There has been a decided decrease in spending amongst many consumers across many income levels, even for wealthy households. For example, many wealthy families are firing unnecessary home staff because of tough economic times.
Americans are becoming increasingly more inclined to spend less as we distance ourselves from stores such as Neiman Marcus, Jimmy Choo, and Best Buy. Although not everyone has changed, several indicators suggest that frugality is becoming an increasing trend.
For example, large vehicle sales have declined 43% whereas Vespa sales increased by 146% over the course of last year. Note that sales for small vehicles increased by 10% over the course of last year. People are avoiding expensive coffee shops like a plague, which prompted Starbucks to recently close 600 stores. Also, according to the NPD group, more and more people are eating meals prepared from home.
Additionally, there is a whole simplicity movement evolving. For example, some are now observing Buy Nothing Day. Books are beginning to celebrate the process of buying nothing for a year. Even some youth are developing an increased interest in saving money on clothes through second-hand shops. Victoria Becham and Heidi Klum received positive PR for taking their kids to Target to shop.
Many American households are becoming thrifty at the same time. Also, there has been a particularly steep rise in the savings rate recently as well. By comparison, throughout the housing bubble, the consumers had a savings rate of zero. This represents a shift in thinking about finances. Just last year, the debt to income level was 19% (according to Smart Money Magazine).
It is hard to view money as the most easily renewable resources while the overall American net worth has lost about 11.1% this year, household worth dropped $2.8 trillion, and people are losing their jobs all around you. Only time will show whether this new frugality is just discipline during tough economic times or good financial habits to build long-lasting wealth.
Copyright 2012, Roshawn Watson, Pharm.D., Ph.D. All Rights Reserved.