Introduction
The scale of consumer debts has made very many house hold in the United States to be extremely vulnerable to economical shocks from the fiscal management and external factors which includes wars, terrorism acts and rise in oil prices. Economic downturn is likely to cause social and economic problems especially for the many millions of people who are struggling to repay their debts. Debt can be triggered at any time by the various types of shocks in the economy which may make them to rise higher and consumers to continue to be in greater debts..
With an economy that is uneven, the class-based distribution of income is the factor which determines investments and consumptions of individuals and households. In the United States, the average personal consumption expenditure which are rated in the bottom 60% of income distribution equaled or even exceeded the 2003 average pre-tax income. The fifth of the population which was just over the 60% used up a five-sixth of their pre-tax on their consumptions. However in contrast, those who are higher on the income pyramid and the relatively well to do people use a smaller percentage of their income in the personal consumption as their incomes are more devoted to investments (US. department of labor 2005).
Status of Consumer debt
The United States consumer debts in the current times has hit staggering levels after reaching doubling and even higher levels over the past ten years. The most recent figures from the Federal Reserve Board shows that the consumer debt in October 2003 went up to 1.98 trillion dollars from the consumer debt three years ago which stood at 1.5 trillion dollars. However these figures only represent the credit cards and car loan debts but it does not include mortgages which approximate to 18,700 dollars for every United States household. In April 2003, the outstanding credits which included mortgages and all other debts reached the 9.3 trillion dollars which represented an increase from the 7trillion dollars mark which was recorded in January 2000. Total consumer debt from credit cards alone stood at 735 billion dollars and the households which carry balances had a credit balanced whose estimates averaged to 12000 dollars.
Due to the circumstances where consumption and investments heavily depend on the spending of the people who are in the low income stream, there is a supposed stagnation and even a decline in the real wages which is likely to result to crisis tendencies for the economy due to constraining of the overall expenditures which are used on consumptions. The real wages in the United States have been sluggish for many decades except for a small rise which was experienced in 1990. The medium income families have therefore sought to compensate this slow increase by increasing the working hours as well as the number of jobs per each household. However, the inflation adjusted income or the real income fell continuously for five years up to 2004 as the bottom 95% experienced a decreased real average income of households in the 2003 and 2004 and in 2005, the real wages fell by 0.8%.
Consumer debt In the US between 2000 and 2003
Unlike the in the past recessions, the current records shows that consumers have continued to borrow from the financial institutions during the last down turn which started in 2001 March and ended in 2001 November. The automobile companies in 2004 continued to offer a zero percent financing which they were doing in the past two years. Consumer spending in the United States accounts for 70% of its domestic products which therefore means that the United States economy is leveraged to the hilt while the world economy is leveraged to the United states consumer. The experts in the consumer debts field have warned that the consumer debt bubble potentially reduces the United States stock market asset bubble which was said to have burst in 2000.
The mortgage debts as well as the consumer credit represents a percentage of disposable income which is higher than the one which was previously experienced. The house debt which is taken as a percentage of the the assets reached a historical figure of 22.6% in the 2003 first quarter. The revelation of the Federal Reserve Board showed that personal savings in the first half of 2003 only dropped to 2% of the income after task but since the debt levels are now substantially higher than they were 20 years ago, the house hold sector in the United States is now more vulnerable than in the past years due to the interest rates which are rising subsequently. The records show that America is now spending 18.1% of their incomes after task to cover their debt and the debt service seems to take the biggest share of the income especially of the families who earn low incomes. People owe so much money such that the debt burden is becoming unimaginable for individual and families in US.
The conventional mortgage foreclosures in 2003 was almost equal to the record which was set early in the year and the mortgage foreclosure was expected to rise up to the 1.15% point as compared to the 2000 0.87 percent. Reports from the American Bankers Association showed that the missed payments or the credit card delinquencies in November 2002 reached a staggering 4.09% and the predictions of the delinquency rates in 2003 were expected to rise from the 4.08% in 2000 to 4.34% in 2003. According to the bankrate.com, the fee income most of which comes from penalty fees accounts for 30% and more of the card- issuers profits due to the increase in the rates of the late payment of fees and over the limit on the card debt by the credit card issuers and also due to the grace payment periods which have been shortened. Many of the credit card issuers have increased the fee for late payments to as much as 40%.
The rate however does not only affect the low income earners but it now affects more and more of the middle income earners and the former higher income earners, air pilots, and even the programmers whose good jobs have been taken to India and therefore they cannot be able to maintain their current lifestyle resulting to consumer debt. People at the age bracket of 65 and above show a faster growth in their indebtedness and as the number of people who are retiring or are attempting to retire become more and more, they are now forced to rely on the Social Security payments which are their only source of income from their retirement. This shows that there is a danger ahead as more people come close to the edge where they could be pushed over by a minor setback, almost a third of filers who are bankrupt have a debt associated to their credit cards which equates to their entire year’s salary. Since 1996, bankruptcies of consumers surpassed 1 million dollars a year which set a record of 1.54 million dollars in the year 2002 and according to the American Bankruptcy Institute (ABI), in the year 2003, fillings of personal bankruptcy seemed to have almost doubled in the past ten years which showed a raise of the 7.4% to six million more in the 12 months which ended in 2003 September. Statements from ABI showed that the non-business bankruptcies accounted for 97.8% of all the bankruptcies which were filed in the federal courts by the creditors. The Cambridge Consumer Index poll showed that many of the Americans new year’s resolution of 2004 was to get out of their debts and it was the first time in their history that so many people prioritized on reducing their debts. This indicates the increasing burden which has been brought by consumer debt which was continually taken by Americans in the year 2003 and also show the increased desire by people to have better and more secure employments (Laurier, 2004).
Consumer debt ten years ago.
In 1998, the outstanding consumer credit reached 1.3 trillion which is an approximate percentage of 21 of the total disposable income and a 15% of the entire GDP of the country. The total household debt which on average has increased since 1990 by about 300 billion dollars, it increased by 450 billion dollars in 1998 which led to an increased total of the household debts to 5.9 trillion dollars and GDP rose to 68%. However, there were no signs of the consumers being worried about their increasing debts and the reducing savings but records showed that the consumers were confident and there was no indication of significant reversal in their spending as the the household debt and the GDP reached historical high figures in 1999. Due to the consumer spending, there was a significant job growth and in Alabama, there was growth of jobs in the service and the trade sectors and the wholesale as well as the retail trade accounted for 50% of the jobs which were created excluding the agricultural jobs. Consumer survey which was published by the US department of Labor in 1997 showed that the average before tax household in come in the west part of the United States was 35691 dollars (Ijaz 1998).
There was an increase in consumer debt between 1998 and 2001, reports from the Federal Reserve Policy showed that over 75% of all families in the United States in 2001 had some debt and the common types of debts which they held was in form of installment loans, home secured debts and credit card balances. There was an increase of the consumer debt obligations between 1998 and 2001 from 35400 dollars to 38,800 dollars respectively. The median balances increased for most of the categories of the consume debts and most of the income level groupings experienced debt obligations increase just like there was increased debts in most of the age groups and ethnic groups. However, the disposable income was a bit higher therefore the debt burdens were a bit lighter.
Consumer debt twenty years ago.
Twenty years ago in December 1988, the consumer debt According to the Federal Reserve was seen to have risen by 4.5 billion Dollars which was the biggest monthly gain during the past three months and the increase placed the total consumer debt to 612.57 billion dollars which was a 6% increase from the previous percentage of 1986. The consumer at the time was in a tenuous position as there was a rise of 1.8% in spending after a vigorous three consecutive years of growth. Consumer spending was seen to grow at just 1.8% in the past year and it was fore casted that such spending was likely to rise at a 1.5% which was an inflation adjusted rate. The automobile loans rose and the consumer debt which included the credit union and bank loans which were not secured by the real estate fell in 1988 (Gilpin 1988). 1988 saw an increased consumer debt of 2.63 billion dollars. There was an explosion in the US economy from 1982 to 1988 as the ratio of debt to GNP which for many decades was noted for its stability climbed to a spectacular peak and most of the excess debt stemmed from the cumulative federal deficits and large part of the debt seemed to have financed real estate investments.
In 1991, the ratio of debt vs GNP was peaking and there was a change from the previous pattern of growth in debt and therefore an improvement in the demand and supply balance for the long term funds which were bound to lead to decline in the long term interest rates. There was a secular increase in the debt ratios for house holds as well as business sectors in 1988; the house hold sector debt increase began after 1976 and the household debt ratio to the Gross National Product of United States rose to 0.654 from 0.470 as the 1988 year came to an end. Mortgage debt constituted 71% of the increase and although most of the attention was focused on the other forms of consumer debt such as the automobile debt and the credit cards among others only constituted the modest part of the extra growth in debt (Synnott, 1991).
For businesses, the sector rose in a steady manner from the 60s until the severe recession which took place between the years 1974 and 1975 and it stagnated for some time before rising again between 1982 and 1989 period. This pattern was experienced due to many factors which included the growth in the multifamily and commercial mortgages which was so important such that it was separated from other forms of credit business. In 1989, the mortgage credit almost doubled and if in 1982 the business mortgage credit had grown in line with the GNP, it would have reached 300billion dollars by the year 1989. At the end of 1989, the additional mortgage credit which was outstanding was 500billion dollars as the residential mortgage debt grew slowly than the business mortgage debt (Synnott, 1991).
In the current times, net worth of Americans has gone up which includes savings which are derived from income and the ones from asset growth which has been invested in the years.
The the total consumer credit which was outstanding had risen to a seasonally adjusted 667.3 billion dollars from 8.9% and at the same time, personal bankruptcies were increasing as the United Stated Department of Justice reported that the non business bankruptcies which were filed in the department increased to 549831 dollars from 12% in 1988 (ABA, 1989).
There was a financial crisis in 1998 and an economic recession in Asia as they though that the recession would reduce the united States exports demand in Asia and although the net exports declined, there was an increased spending by the American consumers. The personal expenditures of consumers in America constitutes the GDPs largest component and in summary, it accounts for 68% of the annual GDP. The private consumption in 1998 was 69.3% of the GDP and the economy of the United States grew by 3.9% whose 85% was constituted by consumer spending. The spending was fueled by low inflation rates, strong growth of jobs, strong demands for houses and due to the rise in stock market valuations. Real terms showed that consumer spending increased by 5% in real terms and there was increased purchases. Due to the increased spending by the consumers in the United States, the consumer debt levels increased simultaneously and the saving rates were low. The savings rates in went as low as zero percent and current records show that it has remained so in the recent times.
Comparison of consumer debt 10 and 20 years back
The Federal Reserve Board’s survey of the consumer finances for year 1998 which were released in the year 2000 January showed that there was a rise in the family debts as a percentage of the entires assets of the family or the family’s total assets. The survey which was conducted showed that the family debts rose from 12.4% in 1989 to 14.4% in 1998, the debt burdens of families or the ratio which indicated the family debt service payments compared to the total family income in the same period of 1989 to 1998 rose from 12.7% to 14.5% respectively. There was a rise in debt burden in the 1990s and it was highest in 1998 especially for the families who were earning less than ten thousand dollars a year. The other debt burden which was next to the families earning less than 10000 a year was families which earned 49999 thousand dollars a year.
However, the families which were earning between the range of 50000 to 99999 thousand dollars were carrying an almost equal debt burden and dropped significantly for those families which were earning annual salaries of 100000 dollars a year and above. This therefore clearly showed that the financial distress was largely confined to the working class families which earned an annual salary of below 50000dollars due to the heavy indebtedness which they experienced hence showing a clear picture of a threat to the families in the United States which were earning an annual salary of less than 10000 dollars and especially those without any assets which they can count on. This financial distress led to bankruptcies and defaults which was seen in families which had a debt which was 60 days past the due date for the payment of the debts. The families which were over sixty days in debt overdue was recorded as 7.3% in 1989 and rose to 8.1% in the year 1998 and all of the income levels saw a marked rise in the level of debt payments since 1992. However, when compared to 1989, the increase in payment defaults by families which were in debt was entirely concentrated among the middle income working class families which were earning an annual income of between twenty five thousands dollars to forty nine thousands, nine hundred and ninety nine dollars. The greatest percentage of indebted families in default was greatest in the families with an annual income of less than fifty thousands dollars and it was less in families which earned higher incomes.
Borrowing pattern in 1998
In 1998, the major increases in debt financing which occurred in home secured debts such as mortgages, second mortgages home equity loans and lines of credit accounted for 72% of the household debts. Families which had the home secured debts saw the median of the debt rise to 12.9% between 1995 and 1998 and the home prices which continues to rise subsidized most of the consumer debts. The mortgage and the home equity loans which had amounts beyond home purchases and renovations constituted the basis for paying off the 34 billion dollars which constituted the 1998 credit card debt alone. Installment borrowing was another areas of increased borrowing and in 1998, it accounted for 12.8% of the family debts. The installment borrowing included consumer loans which have fixed terms and payments such as automobile loans, furniture loans, student loans and durable consumer goods and there was a rise of the installment loans by 36% between 1995 and 1998 (Henwood, 1999).
Conclusion.
In conclusion, The widespread chronic employment difficulties is the one which has drive most of the people in the United States to mostly rely on credit much more than they would have in the normal circumstances. This therefore is what has subsequently resulted to the mounting levels of consumer debts. The upper middle income earners households in the United states use the consumer debt so that they can be able to afford the kind of lifestyle which the live in. The more the number of employed persons who live in the house, there is a greater likelihood of such households in US ending up using the consumer debts. This therefore shows that moat of the households can be able to afford most of the new widely consumer goods which are available by a way of financing their lifestyles which are improved rather than directly owning the consumer goods.
The cost of borrowing of credit by households and individuals seems to increase continuously and even though in the recent times the credit card companies are offering a zero percent rates for the introductory period for customers with who hold good credits, it is obvious that the rates jump there after. In the current times, the banking industries in the United States sees the best client as the one who never pay the loans given to them because they will incur a fee which is beneficial to the banks as compared to the previous times when the best was the one who paid off and in time.
References:
ABA Banking journal, (1989), can the debt-loving consumers pay, journal article, vol 81.
Ahmad Ijaz, (1998), consumer spending and consumer debt, Alabama Department of Industrial Relations, University of Alabama.
Gilpin, K, (1988), consumer debt rose $4.5 Billion in December, New York times, April9, 2008.
Laurier, J, (2004), US consumer debt reaches record levels, WSWS.org, 15 January 2004
Doug Henwood, (1999), Booming, Borrowing, and Consuming: The US. Economy in 1999, Monthly Review, vol. 51(3), p. 122,126.
Synnott, T.W, (1991), the debt explosion of the 1980s business economics, US.
