American debt situation – The good, the bad and the worst

2008 was a memorable year for the American economy. In this year, the nation encountered the worst ever financial crisis that had a number of causes. However, the key reason of the meltdown was probably owing to high debt both by individuals and businesses. Since the debt bubble burst, America has been struggling with the challenge of casting off much of the debt through defaults, austerity and restructuring.

The debt era is back again. Americans owe more debt than they have in the recent past. They are busting out credit cards again in a big way. According to Household Debt and Credit Report by the Federal Reserve Bank of New York, as of 2013 Q4, the amount of consumer debt was $241 billion which was the largest quarterly increase after 2007. The amount of household debt as of 2014 Q2 showed a decrease of $18 billion. Whatever be the statistics, overall debt level remains below their peak in 2008. But the jump in debt is the further proof that consumers have shaken off the outcomes of the recession and their debt appetite will help to fuel up the economic growth of the country.

Now what does the Household Debt and Credit say about the nation’s economic state in 2014? Well, discussed below are the good, bad and evil effects of debt explosion.

american debt situation

The good

Though we emphasize on the negative effects of too much debt, it plays important role in the growth of modern economy. But after a financial crisis, the economy still remains in turmoil. And after the real estate bubble explosion, value of both personal assets and business assets fell significantly. As a result, more money is used to pay down debt instead of taking out debt.

It takes many years for both individuals and businesses to repair their finances after a financial crisis, so the dynamic may continue for years with the economy getting steadily worse. That is the reason why the surge in consumer debt is a good thing. It ensures that people are finally repairing their personal finance and feel like they can again start borrowing. Under such circumstances, the economy of the nation can really start growing once again.

The bad

If you carefully go through the Household Debt and Credit Report by the Federal Reserve Bank of New York, you can see signs of divergence of American economy. If you consider mortgage debt, you will see that it has been denied for Americans whose credit score is low, perhaps owing to foreclosure activities. It can be assumed that the Americans with low credit score are having restricted access to borrowing. But this difficulty for the less creditworthy Americans in getting any kind of home loan proves that the housing finance system of the country is still under renovation. People with little to medium income are not experiencing adequate increase in income.

The worst

The worst thing is people with low credit score are simply racking up their debt in student loan category. There would be nothing problematic as such with less creditworthy Americans if they would have used the money towards proper education that helps to boost the borrower’s income in due course. Rather it would be a wise investment then. But the thing is that it is not very clear if the people taking out student loan are properly utilizing the money.

US economyThe chart above shows the delinquency rates for different types of loans and as you can see student loan delinquency rate is on the rise.

The federal government, the main issuer of student loan doesn’t ask for a proper repayment plan. Student loan delinquency rate shows that a huge number of students would not be able to pay the loan off and due to bankruptcy laws, they won’t have the choice to discharge the debt in most cases. Federal student loan is given depending on the requirement and desire.

In the conclusion, it can be said that if this amount of rising personal debt burden is being driven, it would cause major economic concern for the U.S. economy to go further.

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