Americans drowning in red ink

An article from the Associated Press appeared in the Deseret News in Salt Lake City in January, 2004. The article indicated that as the bills arrived from the holiday spending spree, Americans found the mountain of debt grew even higher.

Consumer debt has more than doubled in the past 10 years to record levels, making it hard for many families to cope.

Consumer debt hit a record $1.98 trillion in October 2003, according to the most recent figures from the Federal Reserve Bank. That debt, which includes credit cards and car loans, translated to an average of $18,700 per household.

At the same time, the federal government says the nation's savings rate dropped to just two percent of after-tax income the first half of the year. That means many people lack the means to deal with financial emergencies, much less their eventual retirement.

How did American consumers get so deeply in debt?

Robert D. Manning, a sociology professor at the Rochester Institute of Technology who wrote "Credit Card Nation - The Consequences of America's Addiction to Credit," says the problem dates back to the l980s. That's when financial institutions began issuing credit cards and making loans to people who wouldn't have qualified in the past.

"At the same time, people had this sense of entitlement based on the idea that this generation was expected to outperform the earlier generation," Manning said. "It was OK to buy yourself a better standard of living than your parents, and the banks would help you do it."

As of this date, the nation's credit card debt stands at $735 billion, or nearly $7,000 per household. Since about 40 percent of card users pay their balances in full every month, the per capita card debt of those who carry balances is closer to $12,000.

In the same article, Joel Greenberg, chief executive officer of the non-profit Novadebt Credit Counseling Service in New Jersey said, "Through the go-go 90s, the irrational exuberance wasn't just in the stock markets, it was throughout society. We became phenomenal consumers, and deplorable savers!"

What's surprising about the nation's debt is that it has continued to rise, despite record numbers of mortgage refinancing from 2001 to 2003, many of them yielding cash that consumers have used to pay down credit card balances.

Mark Zandi, chief economist at Economy.com, points out that the rate of growth of card debt has slowed "because people are using their homes as cash machines." But while refinancings have allowed upper-income households to put their balance sheets in order, lower-income families without that option are finding it harder to cope, he said.

"They are the folks filing for bankruptcy in record numbers; they're the ones facing repossession and foreclosures, "Zandi said.

Consumer bankruptcies have exceeded 1 million a year since 1996, hitting a record of 1.54 million in 2002. Bankruptcy filings totaled 1.25 million during the first nine months of 2003 and could set a new record when full-year tabulations are done by the Washington-based American Bankruptcy Institute.

There's debate about how the high debt levels and demanding repayment schedules will affect the economy.

Americans currently spend a near-record 18.1 percent of their after-tax income to cover debts, including mortgages. That limits their ability to borrow more to spend more, and consumer spending accounts for about two-thirds of the economy.

Federal Reserve Chairman Alan Greenspan has pointed out that because of low interest rates, consumers can more easily handle their debt so the level is "not a significant cause of concern."