Yes, You Should Be Concerned With Consumer Debt

Tyler Durden's picture

Authored by Lance Roberts via,

Just recently the Federal Reserve Bank of New York released its quarterly survey of the composition and balances of consumer debt. Importantly, it was the fact that total indebtedness reached a new all-time record that sent the mainstream media abuzz with questions about the economic implications. Here is the graphic that accompanied the commentary.

One of the more interesting points made, in order to support the bullish narrative, was that record levels of debt is irrelevant because of the rise in disposable personal incomes. The following chart was given as evidence to support that claim.

Looks pretty good, as long as you don’t scratch too deeply. Let’s scratch a little.

There are several problems with this analysis.

First, the calculation of disposable personal income, income less taxes, is largely a guess and very inaccurate due to the variability of income taxes paid by households.

Secondly, but most importantly, the measure is heavily skewed by the top 20% of income earners, needless to say, the top 5%. As shown in the chart below, those in the top 20% have seen substantially larger median wage growth versus the bottom 80%.

(Note: all data used below is from the Census Bureau and the IRS.)

Lastly, disposable incomes and discretionary incomes are two very different animals. Discretionary income is what is left of disposable incomes after you pay for all of the mandatory spending like rent, food, utilities, health care premiums, insurance, etc. According to a Gallup survey, it requires about $53,000 a year to maintain a family of four in the United States. For 80% of Americans, this is a problem even on a GROSS income basis.

This is why record levels of consumer debt is a problem. There is simply a limit to how much “debt” each household can carry even at historically low interest rates.

It is also the primary reason why we can not have a replay of the 1980-90’s.

“Beginning 1983, the secular bull market of the 80-90’s began. Driven by falling rates of inflation, interest rates, and the deregulation of the banking industry, the debt-induced ramp up of the 90’s gained traction as consumers levered their way into a higher standard of living.”

“While the Internet boom did cause an increase in productivity, it also had a very deleterious effect on the economy.


As shown in the chart above, the rise in personal debt was used to offset the declines in personal income and savings rates. This plunge into indebtedness supported the ‘consumption function’ of the economy. The ‘borrowing and spending like mad’ provided a false sense of economic prosperity.


During the boom market of the 1980’s and 90’s consumption, as a percentage of the economy, grew from roughly 61% to 68% currently. The increase in consumption was largely built upon a falling interest rate environment, lower borrowing costs, and relaxation of lending standards. (Think mortgage, auto, student and sub-prime loans.)


In 1980, household credit market debt stood at $1.3 Trillion. To move consumption, as a percent of the economy, from 61% to 67% by the year 2000 it required an increase of $5.6 Trillion in debt.


Since 2000, consumption as a percent of the economy has risen by just 2% over the last 17 years, however, that increase required more than a $6 Trillion in debt.


The importance of that statement should not be dismissed. It has required more debt to increase consumption by 2% of the economy since 2000 than it did to increase it by 6% from 1980-2000.


The problem is quite clear. With interest rates already at historic lows, consumers already heavily leveraged and economic growth running at sub-par rates – there is not likely a capability to increase consumption as a percent of the economy to levels that would replicate the economic growth rates of the past.

This can be clearly seen in the following chart of personal consumption expenditures (PCE) and debt. Up until 2000, debt expansion and PCE rose in tandem. But beginning in 2000, as economic growth rates plunged to 2%ish, which isn’t strong enough to foster job growth beyond population growth, debt took the lead in supporting consumption. This was primarily centered on those in the bottom 80% who were simply trying to maintain their current standard of living.

There is a vast difference between the level of indebtedness (per household) for those in the bottom 80% versus those in the top 20%.

Of course, the only saving grace for many American households is that artificially low interest rates have reduced the average debt service levels. Unfortunately, those in the bottom 80% are still having a large chunk of their median disposable income eaten up by debt payments. This reduces discretionary spending capacity even further.

The problem is quite clear. With interest rates already at historic lows, the consumer already heavily leveraged and wage growth stagnant, the capability to increase consumption to foster higher rates of economic growth is limited.

With respect to those who say “the debt doesn’t matter,” I respectfully argue that you looking at a very skewed view of the world driven by those at the top.

Yes, the ongoing interventions by the Federal Reserve have certainly boosted asset prices higher, but that has only served to widen the wealth gap between the top 20% of individuals that have dollars invested in the financial markets and everyone else. What monetary interventions have failed to accomplish is an increase in production to foster higher levels of economic activity.

Corporate profitability is illusory also as it has primarily been a function of cost cutting, increased productivity, stock buybacks, and accounting gimmicks. While this has certainly provided an illusion of economic prosperity on the surface, however, the real economy remains very subject to actual economic activity. It is here that the inability to re-leverage balance sheets, to any great degree, to support consumption provides an inherent long-term headwind to economic prosperity.

With the average American still living well beyond their means, the reality is that economic growth will remain mired at lower levels as savings continue to be diverted from productive investment into debt service.  The issue, of course, is not just a central theme to the U.S. but to the global economy as well.  After eight years of excessive monetary interventions, global debt levels have yet to be resolved.

Debt is a negative thing for the borrower. It has been known to be such a thing even in biblical times as quoted in Proverbs 22:7:

“The borrower is the slave to the lender.”

Debt acts as a “cancer” on an individual’s wealth as it siphons potential savings from income to service the debt. Rising levels of debt, means rising levels of debt service that reduces actual disposable personal incomes that could be saved or reinvested back into the economy.

The mirage of consumer wealth has been a function of surging debt levels. “Wealth” is not borrowed, but “saved,” and this is a lesson that too few individuals have learned.

Until the deleveraging cycle is allowed to occur, and household balance sheets return to more sustainable levels, the attainment of stronger, and more importantly, self-sustaining economic growth could be far more elusive than currently imagined.

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spastic_colon's picture

a while ago someone posted a chart of the amount of debt that it took just to maintain "standard of living" was at an all time high, that's all you need to know/say.

you can tell people to live within their means but thier neighbors will make fun of them so they allow their insecurities to dictate their decision making........sad.

toady's picture

I do kinda dismiss consumer debt....

Silvery Dan's picture

You gotta pump those numbers up, those are rookie numbers

toady's picture

I get so focused on government debt and unfunded liabilities... and it makes consumer debt look like a red headed stepchild.

doctor10's picture

In a surveillance society "Anything" worth investing in -that you discuss by phone or email-is immediately glommed onto by the Deep State and their NY cronies. Has been so for the last 15 years.

At the end of the day its why interest rates -at least in 100% traceable accountable taxable regulatable and ultimately takable dollars are basically 0% give or take a few fractions of a percent. FWIW if you want to borrow BTC now interest rates can be 12-13%!!

"value" is anonymity and privacy in conduct, thought and action-one of the consequences of which is enhanced ability to keep the fruits of your own labor. It also is the only means through productivity can increase across society. Electronic currencies actually fulfilling those needs will be the most valuable-there is yet to emerge one that clearly does so.

Ask East Germany and the Soviet Union exactly how well a surveillance society worked out during the 20th century. The 21st is no different in that regard

ET's picture

Gold and Silver will be valuable many decades from now.

Crypto will be laughably obsolete.

If you want to sneak wealth across borders, you would want fine art and rare stamps.

Even Janet Yellen owns about $50,000 in collectible stamps according to her financial disclosures. Extremely portable.

tmosley's picture

>If you want to sneak wealth across borders, you would want fine art and rare stamps.

There are no words for how stupid you are.

ET's picture

Stumbling across a lost piece of art can be quite an experience. This is especially true when finding a rarity produced by masters like Van Gogh or Picasso.

Back in 2004, Carl Sabatino’s aunt Jenny told him to check her sewing machine. A few days away from her death, she kept reminding him. What he found was a Pablo Picasso painting called “Woman With a Cape”. A small compartment in the old sewing table had been concealing the painting for decades.

Sabatino showed Inside Edition exactly how he discovered the piece and what steps he’s taken to authenticate it since. The original painting is on exhibit at The Cleveland Museum of Art. Signed in the upper left corner, it’s estimated that Picasso completed it around 1901.

ET's picture

PARIS (Reuters) - A painting found in the attic of a house in southwest France two years ago was attributed to the Italian master Caravaggio by private French experts who hailed its discovery on Tuesday as a great event in the history of art.

The work, which depicts Biblical heroine Judith beheading an Assyrian general, was found by the owners of a house near Toulouse as they investigated a leak.

It could be worth 120 million euros ($137 million), the Eric Turquin art expert agency said in a statement.



tmosley's picture

You're really going to continue promoting this full retard idea?


Anyone who puts ANY credibility into ANYTHING you have to say about finance after reading this deserves to lose everything they have.

Silver Savior's picture

Meanwhile lots of paintings sell for millions of dollars and are shown by the finest establishments. Same with rare coins.

Silver Savior's picture

What's wrong with that? I thought it was a good idea. I think you are taking your crypto a little too far. Crypto is not a cure all for all ailments.

Byrond's picture

Or maybe fields of grain and hogs will be worth the most. If we get clobbered back to the 1700's economically. 

Defiated's picture

sorry, but as I am a 'Stamp & Coin' dealer, the reality is that 'stamps', for the most part, are dying as the older generation passes

and the kids couldn't care less....Better to just have Gold & Silver and any coins you can buy at less than a 10% premium over spot..

Stamps are like most other 'comic books'....the top .01% catch a bid...the rest are 'fire starter'

Pollygotacracker's picture

You are so right. eBay will be an obsolete website in the coming years. Younger people do not collect stamps, pottery, old coins, fine china, costume jewelry, antique toys, all the stuff that was selling well on eBay in times past. If eBay survives, the site will look a lot more like Amazon.

Fake Trump's picture

Who cares. I am only concerned when my wife tells "not tonight". 

Byrond's picture

Yes. But also commercial debt. It's got to be insanely high. There'a also the ever-increasing state taxes and whatnot. No way Americans can afford all that for much longer. Houston will probably be a major wakeup call. No way we can pay for all that stuff. Collapse is imminent. 

SubjectivObject's picture

Consumer debt will play in the strength of Houston's Harvey recovery effort.

I predict lots of bankruptcies and neighborhood degeneration due that a significant proportion of residents cannot finance their recovery/rebuilding.

We read recently that 60-70% of US households are living paycheck to paycheck, and the significance of that statistic has to be reflected in the populationg affected by Harvey.

ToSoft4Truth's picture

I have a paid-off house right now and am reconsidering.  I don't have flood insurance.  If a flood comes I'm out the loot.  If I had a mortgage, the bank would be out the loot. 


Same with riots and vandalism - home owners insurance do not pay-off for riots or vandalism. 

Why should I carry the risk?

ET's picture

The Second Amendment is your riot and vandalism insurance.

GunnerySgtHartman's picture

Indeed it is, sir.  I will be increasing the amount of my riot and vandalism insurance over the weekend with a purchase of more brass-encased lead.

Pollygotacracker's picture

When you have a mortgage, the bank requires you to carry flood insurance if your property is located in a flood plain. I do not have a mortgage, but I do carry an insurance rider to clean up/repair my basement in the event of a flood. I too am considering upping my coverage. You never know.

Savvy's picture

In high school I learned how to file my taxes but I never learned about fractional reserve banking. At least, eventually, I taught myself. It's sure paying off now.

Peacefulwarrior's picture

"Until the deleveraging cycle is allowed" that phrase is key to this whole story and so far betting against it gets you monkeyhammered

Silver Savior's picture

I am in no way concerned with consumer debt. In fact I wish for everyone to get into more debt. Get every credit card you can get! Easy money until it all dries up like it did during the 2008 recession. I want a reset 

The more defunct things get the sooner there will be a reset.

Falling Down's picture

Long 84 month vehicle loans...

GoldHermit's picture

tick, tick, tick, tick

Dragon HAwk's picture

We the Few the Proud,  Debt Free.

Batman11's picture

They tried running an economy on debt in the 1920s.

The 1920s roared with debt based consumption and speculation until it all tipped over into the debt deflation of the Great Depression.

Keynes looked at the problems of the debt based economy and came up with redistribution through taxation to keep the system running in a sustainable way.

The cost of living = housing costs + healthcare costs + student loan costs + food + other costs of living

Disposable income = wages – (taxes + the cost of living)

High taxation funded a low cost economy with subsidised housing, healthcare, education and other services to give more disposable income.

Keynesian ideas went wrong in the 1970s and everyone had forgotten the problem of the debt based economy that he originally solved.

Rinse and repeat.

1920s/2000s – high inequality, high banker pay, low regulation, low taxes for the wealthy, robber barons (CEOs), reckless bankers, globalisation phase

1929/2008 – Wall Street crash

1930s/2010s – Global recession, currency wars, rising nationalism and extremism

Well here we are again.

Einstein’s definition of madness “Doing the same thing again and again and expecting to get a different result”

Batman11's picture

The debt based economy seems to work as long as you don't look at private debt.

We bought back 1920s, neoclassical economics, that doesn’t look at private debt.

Everything seems to be going so well before 2008 (just like the 1920s). 

1929 and 2008 stick out like sore thumbs when looking at unproductive, private debt in the economy.

The UK:

The real estate economy.

Dig Deeper1's picture

"There is simply a limit to how much “debt” each household can carry even at historically low interest rates."  Point of clarification, households can CARRY potentially unlimited debt depending upon underwriting standards.  The real problem is that there is a limit to how much debt they can SERVICE.  Defaulting is always an option.

DemandSider's picture

"Defaulting is always an option."

No. Student debt can't usually be discharged, and there are other limits to bankruptcy.

Batman11's picture

There is too much money to be made by people not understanding the system.

“…banks make their profits by taking in deposits and lending the funds out at a higher rate of interest” Paul Krugman, 2015.

A 21st century Nobel prize-winning economist, who doesn’t know what banks do.

21st century neoclassical economics that doesn’t look at banks, money or debt.

2008 – “How did that happen?”. The two statements above account for why it has been attributed to a “black swan” by the mainstream.

There is too much money to be made by people NOT understanding banks, money and debt and having an economics that ignores them.

Progress towards financial stability tends to follow a regressive path at anytime the truth is approached.

Monetary theory has been regressing since 1856, when someone worked out how the system really worked.

Credit creation theory -> fractional reserve theory -> financial intermediation theory

“A lost century in economics: Three theories of banking and the conclusive evidence” Richard A. Werner

Milton Freidman’s “monetarism” didn’t work in the 1980s because he was using a flawed theory, “fractional reserve theory”, and today we have regressed further to “financial intermediation theory” (see Paul Krugman above).

Milton Freidman thought the money supply was controlled by Central Bank reserves. If he had done a bit more homework he might have discovered the Asian Tigers used “Window Guidance” to control the money supply successfully. The Central Bank sets defined limits on bank credit to control the money supply.

There is too much money to be made through financial instability to let this idea proliferate.

Michael Hudson has studied the work of ancient Mesopotamian scholars in 3,000 BC. They studied compound interest and the doubling time of debt to see how debt quickly rose above society’s ability to pay it. They put in place jubilee years to cancel debt before it destroyed society.

Today we see nations wrecked on the assumption all debt can be paid, e.g. Greece and many South American nations.

“Compound interest is the eighth wonder of the world. He who understands it, earns it ... he who doesn't ... pays it.” Albert Einstein

The 5,000 year regression in the understanding of compound interest has a purpose.

We never even get near financial stability, because there is so much money to be made out of financial instability.   



Batman11's picture

The independent Central Bank was an idea for financial stability to ensure they were independent of requests from Governments to print money to bribe voters.

The independent Central Bank has proved to be far too closely coupled to banker’s interests and the banking system has required more money printing than any Government would ever request.

As they are now closely coupled to banks, their QE just acts as bank reserves which can’t enter the real economy as people aren’t borrowing. The banks have access to the money but people don’t; asset prices are maintained but inflation goes nowhere. This is what we see and Richard Koo has the data on the ridiculous levels of bank reserves in the UK, US, Japan and the Euro-zone.

If they could print money for Governments, they could carry out infrastructure projects to create jobs and wages which would spur the real economy and demand.

US companies engage in share buybacks, waiting for demand to rise before engaging in real investment, this is Keynes’s “liquidity trap”.

Nothing was moving in the 1930s in the US due to the same problems, monetary policy without fiscal policy, and the resulting "liquidity trap".

Richard Koo's video explains the mistake Christina Romer made when analyzing the 1930s data. She thought it was monetary policy and not fiscal policy that got things moving again in the 1930s, but she was wrong. This mistake is the basis for current belief monetary policy will work, but it’s wrong. 

Richard Werner’s study seems to show the BIS and Central Banks are not making real efforts to understand how the system works and has noted people at the BoE referring to all three monetary theories above as they don’t seem to be able to decide how the system works when it is a defined system they control.

The independent Central Bank was an idea for financial stability, but not a very good one.

Batman11's picture

Thomas Jefferson in 1809 knew the benefits of financial instability to bankers:

“If the American people ever allow private banks to control the issue of their  currency, first by inflation, then by deflation, the banks…will deprive the people of  all property until their children wake-up homeless on the continent their fathers conquered…. The issuing power should be taken from the banks and restored to the people, to whom it properly belongs.”

What happened?

American people allowed private banks to control the issue of their currency.

He did warn you.

Hume's picture

No, it's not a huge problem.   Here's another chart.  Charge offs for consumer loans are stable near historic lows.

DemandSider's picture

We've been buying more goods and services than we sell the world since 1986. Whether this debt burden, or, the difference between imports and exports, can be shifted to government and/or the private sector, it doesn't matter. Eventually, it becomes too onerous to bear, and crippling debt deflation occurs. Our only option is that which we're engaged in right now, a gradual liquidation to the highest bidder:  The PRC, which has an unsurmountable trade surplus with us. We can expect a gradual colonization to continue, and it will become even more obvious, in time, who really won The Cold War.

NumbersUsa's picture

By the way, George Soros's real name is Gyorgy Schwartz, another jew supremacist hiding behind a gentile name.


Quote from Thomas Jefferson (not THE TJ)

"While I am glad to see there are people among the Jewish community who denounce the actions of the Zionist agenda, far more needs to be done publicly to spread the knowledge about these Satan worshiping atheists being humanities most dangerous enemy. 

We must declare war on the bankers who gave us the most destructive monetary system ever conceived. This system is designed to bankrupt world governments and their respective countries via compound interest that is impossible to repay. It has already transferred the vast majority of global wealthy to the bankers as governments struggling to pay off bank loans are forced to sell assets/utilities owned by the public.

It is time to confiscate all bank stocks, liquid assets and the power of currency creation must be taken away from the banks and returned to the commonwealth of the people of each country and their official governments. This is the Achilles heel of all banks and where the Zionists have obtained ALL their power. All bank loans are to be cancelled globally.

 All immigration needs to cease immediately to defy the Zionist agenda to assimilate and dilute the purity of our racial nationalities. Our history needs to be re-written to expose the guilty for their lies and deception. Crime tribunals must be constructed to hold the Zionists/Mossad accountable for their belligerent, murderous and savage acts committed against humanity especially for their brutality and decimation of the Palestinian people."