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0.08% — The annual rate at which U.S. consumers have pared down their debts since mid-2008, not counting defaults.
U.S. consumers might not be quite as virtuous as they seem.
The sharp decline in U.S. household debt over the past couple years has conjured up images of people across the country tightening their belts in order to pay down their mortgages and credit-card balances. A closer look, though, suggests a different picture: Some are defaulting, while the rest aren't making much of a dent in their debts at all.
First, consider household debt. Over the two years ending June 2010, the total value of home-mortgage debt and consumer credit outstanding has fallen by about $610 billion, to $12.6 trillion, according to the Federal Reserve. That's an annualized decline of about 2.3%, which is pretty impressive given the fact that such debts grew at an annualized rate in excess of 10% over the previous decade.
There are two ways, though, that the debts can decline: People can pay off existing loans, or they can renege on the loans, forcing the lender to charge them off. As it happens, the latter accounted for almost all the decline. Our own analysis of data from the Fed and the Federal Deposit Insurance Corp. suggests that over the two years ending June 2010, banks and other lenders charged off a total of about $588 billion in mortgage and consumer loans.
That means consumers managed to shave off only $22 billion in debt through the kind of belt-tightening we typically envision. In other words, in the absence of defaults, they would have achieved an annualized decline of only 0.08%.
To be sure, this analysis holds consumers to a harsh standard. Defaults happen even in normal times, and are typically offset by even stronger growth in new mortgage and consumer loans. By holding their debts steady, consumers are actually being a lot less profligate than usual.
That said, the way U.S. consumers are shedding their debts isn't encouraging. Aside from defaults, many are finding relief by refinancing mortgages at extremely low interest rates — the same low interest rates that are making it difficult for an increasing number of older folks to generate enough fixed income for a comfortable retirement. The relief might help debt-ridden consumers get into a position to start spending again sooner than they otherwise would, but the borrower's gain is the saver's loss.
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The Fed knows all.
There are a lot of good comments. The name of this game is cash flow. If you are relying on someone else to pay you then it will be tough but if you can earn money for yourself then you have a chance to take control of this.
First, I’d like to know where the numbers come from. The flow of funds report http://www.federalreserve.gov/releases/z1/current/z1.pdf shows a decrease from 13.9T to 13.5T and AFAIK chargeoffs are only released as a % so I’d like to see the $588B calculation. More importantly, the decrease in consumer debt is not directly comparable to chargeoffs. Over the last 2 years, new loans have been made (some just utilization of old credit), loans paid down, interest & fees accrued, etc.
I am tired of reading about the obesity and personal irresponsibility of these americans -
Our country has come down to a society of ill bred characters that I refuse to pay for the down the road.
Makes me sick, I dont feel sorry for any of them!
Continued: How about giving people who are making their payments and are financially responsible some extra money so they can spend it and stimulate the economy?
Oh wait, that won’t work because it is already their tax dollars footing the bill.
Real Time Economics offers exclusive news, analysis and commentary on the economy, Federal Reserve policy and economics. The Wall Street Journal’s Phil Izzo and Sudeep Reddy are the lead writers, with contributions from other Journal reporters and editors. Send news items, comments and questions to realtimeeconomics@wsj.com.
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