American Debt

Debt, while once viewed as a negative for the average American, now  seems to simply be a part of life. Using credit and having debt outstanding is normal now not only for the most people, but for the government as a whole.  The US federal government deficit is currently over $13 trillion and is growing by about $4.09 billion each day. To put this amount into perspective, with a $13 trillion debt obligation, each person in the world owes almost $2,000. That is $2,000 for 6.7 billion people.

This public debt isn’t anything new for our economy; it’s a part of our history. The only time when the U.S. was actually debt free was during Andrew Jackson’s presidency, when he ordered it to all be repaid. Today, our national debt remains at around 53% of our GDP. Compared to Japan’s public debt to GDP of 192%, the US doesn’t look quite as bad. Still, debt is borrowed and has to be paid back eventually. The Federal Reserve could crank up their printing press and increase inflation to pay it all back, or default on government bonds. Neither of these situations are likely, but since the Federal Reserve has done the ‘print more money’ trick before, it’s not improbable to think that something drastic couldn’t be considered.

Below is a comparison of the immense Federal Government deficit to American household debt. If public debt is increasing, it should follow that private debt is on the same path. When plotted on a simple graph, it is true and highly positively correlated at 97%:

Of course, just because two figures are highly correlated, there is not necessarily a cause and effect relationship. When public debt increases, it doesn’t cause private debt to increase. There are numerous other factors that play a role. That being said, seeing the exponential explosion of debt and the relationship between the two figures on a graph can help put things in perspective and lends a little credence to the theory that overall, Americans are becoming desensitized to debt.

With the economic recession and high unemployment levels, it isn’t surprising that household debt has increased. Cardweb.com, a credit industry reporting website, states that American households with at least one credit card owe more than $8,000 in debt. However, this number has been found to be skewed by a portion of the population with a vast amount of debt. After analyzing the credit card debt of those surveyed, Bill Whitt at the VIP Forum, a Washington D.C. research firm, found that only 29% of households owe $1,000 or more on their cards. Although almost 75% of Americans owe less than $1,000 on their credit card bills, the effect on the economy can be huge. The collapse of the mortgage market is an easy illustration of how the default of a small portion of loans can have a tremendous effect on the economy.

How can you safely leverage yourself against the perils of debt? Unlike the Federal Deficit, there are ways to tangibly protect you and your family from debt and potential bankruptcy in your own home. One of the first and probably hardest lessons to learn is to not let your eyes be bigger than your wallet. Simply speaking, don’t buy things you can’t afford – especially if its monthly payments will max out your budget. Small amounts of debt over time will end up accumulating and eating away at your savings. Another couple of steps to take are in the world of credit cards. The best way to maintain good credit is by paying your balances in full and on time. If you are unable to keep track of your different balances, then you many want to consolidate into one or two cards.

There is no simple “cookie-cutter” answer on personal debt that would suffice for every personal situation. The best advice is common sense. Be fully aware of the combination of your personal credit balances (bills, loans, and mortgages), disposable income and spending habits. From there, set a budget and adjust to your own wants and needs. You may find that you’re spending more than you’re making and need to cut back in a certain area, or that you should go ahead and pay off a high interest bill while maintaining the minimum payment on others. You may even find that you are able to save for retirement or other endeavors.

If the general population becomes more aware and averse to debt while they are still able to recoup, maybe the government will learn a lesson from its people – to cut out unnecessary spending and manage current resources wisely.

By Paige Slusser

Recent Tweets

wwm twitter

Join the email list for a bimonthly newsletter focused on financial topics. Why wait? https://t.co/rp6dnPV5Bo https://t.co/ibetzceQ0B
- Sunday Apr 23 - 9:08pm

wwm twitter

New parents, which do you plan to prioritize: saving for retirement or your kid's co... https://t.co/NEDmkSUjgy https://t.co/pDZxhz0y0d
- Friday Apr 21 - 9:07pm