Some people say a man is made outta mud
A poor man’s made outta muscle and blood
Muscle and blood and skin and bones
A mind that’s a weak and a back that’s strong.
You load sixteen tons, and what do you get
Another day older and deeper in debt
Saint Peter don’t you call me ‘cause I can’t go
I owe my soul to the company store.
The WSJ begins with defining the struggling middle class in the U.S. and wonders if are we taking on too much debt as salaries stagnate.
- The American middle class is falling deeper into debt to maintain a middle-class lifestyle.
- Cars, college, houses, and medical care have become steadily more costly, but incomes have been largely stagnant for two decades, despite a recent uptick. Filling the gap between earning and spending is an explosion of finance into nearly every corner of the consumer economy.
- Consumer debt, not counting mortgages, has climbed to $4 trillion—higher than it has ever been even after adjusting for inflation. Mortgage debt slid after the financial crisis a decade ago but is rebounding.
Credit cards are only part of the issue.
- Student debt totaled about $1.5 trillion last year, exceeding all other forms of consumer debt except mortgages.
- Auto debt is up nearly 40% adjusting for inflation in the last decade to $1.3 trillion. And the average loan for new cars is up an inflation-adjusted 11% in a decade, to $32,187, according to a Wall Street Journal analysis of data from credit-reporting firm Experian.
- Unsecured personal loans are back in vogue, the result of competition between technology-savvy lenders and big banks for borrowers and loan volume.
The WSJ points to a chart that indexes non-Housing debt compared to housing debt in 2016. The striking point until this shift: Americans borrowed more on their mortgages than they did on student debt, auto loans, credit cards, and personal loans. The times are changing.
- Taking on a mortgage to buy a house that could appreciate, or borrowing for a college degree that should boost earning power, can be wise decisions.
- Borrowing for everyday consumption, or for assets such as cars that lose value, makes it harder to save and invest in stocks and real estate that tend to create wealth. So the rise in consumer borrowing exacerbates the wealth gap.
But, despite the dark cloud, we may still better off than during the Great Recession.
- Counting all kinds of debt, including mortgages, consumers aren’t nearly as debt-burdened as they once were. In the fourth quarter of 2007, the last year before the financial crisis struck, households devoted 13.2% of their disposable income to debt service. In the first quarter of 2019, that number was 9.9%, largely due to low-interest rates.
The moral of today’s story: consumers need to watch their debt. Getting credit is easy and often fun. Paying back your debts can be all-consuming, particularly if your salary does not grow as quickly as your debt.
Overview by Brian Riley, Director, Credit Advisory Service at Mercator Advisory Group