Chuck Madere: America’s Total Debt Report cont.

Chuck Madere Here with a continued report by Michael Hodges

HOUSEHOLD DEBT - soaring to new records - - are many at risk from home equity loans for consumption?

Household debt was $13.8 Trillion in 2007, up $1 Trillion over the prior year.
Of the $13.8 trillion, $10.5 trillion was for mortgages and most of the balance for credit purchases.

The left chart shows the trend of household debt as a share of national income from 1963-today.

Note the left side of the chart - - showing the household debt ratio in the 1960s and early 1970s held steady at about 53% of national income - which means household debt was not growing faster than growth of the total economy.

We recall from Family Income Report charts that prior to 1970 family incomes were rising year after year - but thereafter (debt ratios started zooming upward per this chart) and then family incomes adjusted for inflation ceased to grow, and instead stagnated for the following 30+ years.

Soon after, personal savings peaked and started down.

This chart such suggests real equity & savings have not been the driving force of so-called economic growth - - it has been debt driven.

The left chart shows thereafter the debt ratio then exploded like a rocket - to today’s historic record high debt ratios at 123% of national income (or $13.8 trillion total household debt -  a debt increase of 100% since 2000).

If today’s debt ratio (123% of net national income per this chart) had been the same as in the earlier years on this chart, the chart’s curve would be horizontal instead of soaring upwards, and then today’s debt in dollars would have been $8.9 Trillion less than it was in 2007. In other words, 2007 household debt would have been $4.9 Trillion - - not the $13.8 Trillion that did occur.

This shows that the economy is more leveraged by household debt than ever before.

And, households are even more at the mercy of credit and mortgage rates.

HOUSEHOLD DEBT PER PERSON

The next chart records the trend of inflation-adjusted household debt per man, woman and child (in constant 2005 dollars).

Today’s level of  household debt of $13.8 trillion, up 1 trillion over the prior year, is equivalent to $46,115 per person - a new record.
Equivalent to $184,460 per family of 4.

Note the chart’s upward slope has become steeper and steeper during the past 15 years. This chart shows household debt per person, adjusted for inflation, has increased over 500%.

Other data shows that the move some years ago to home equity loans to cover consumer consumption on credit may be one of the driving forces of this debt explosion - - whereas prior to that time perhaps the higher interest rates of credit cards more restrained household debt expansion than has home equity loans. This suggests that there may be a nation-wide erosion of household equity in homes.

Other data also shows record family debt payments, as a percentage of disposable income. And - personal savings are the lowest in history. And - home equity lowest in history.

The long-term impact on family incomes, shown in graphic form, is in the Family Income Report.
"The U.S. financial system is dependent to an unprecedented degree upon the greatest housing-real estate bubble in human history, led by Fannie Mae. Unless corrective measures are taken, the inevitable collapse and the ensuing devastation will destroy millions of families."-  by Richard Freeman - www.larouchepub.com/other/2002/2924fannie_mae.html

Even students are learning how to go into debt up to their necks. The federal General Accounting Office, according to AP’s Martha Irvin in January 2002, says college students are graduating with an average of $19,400 in student loans. Additionally, average student credit card debt rose 46% from 1998 to 2000, according to the student loan agency Nellie Mae. Meanwhile, universities promote credit cards issued by agencies who kick-back to them.

Auto loans > In addition to soaring home equity mortgages which consume owner stakes in their homes, according to USA Today (2/16/04) the average automobile loan today is for 63 months, with some going as high as 80 months, compared with an average of less than 48 months five years ago - - and about 24 months in the 1950s. In 1997, banks financed an average 89% of a new vehicle’s price. Last year, it was 101% since consumers borrowed to cover the amount they were upside down on their trade-in. And get this…40% of all trade-ins involve upside-down car loans. (this author recalls when he entered the workforce in the late 1950s normal down payment was on-third cash for a car, with 18 month financing for the balance. Quite a contrast to current times.)

Credit Cards > A massive 42% of Americans are making just minimum payments or no payments on their credit card balances, according to the Cambridge Consumer Credit Index in March 2004.  Of those respondents surveyed with revolving balances on their credit cards, 39% made only the minimum payment due and 3% made no payments at all last month. Another 39% paid less than half the balance owed but more than the minimum, while 19% paid more than half their balances.

by Michael Hodges - email
updated June 2008
- a chapter of the Grandfather Economic Reports -

Thank you for reading,

Chuck Madere