Private debt is skyrocketing to worrying levels, as America leaves its culture of thrift far behind.
Private debt is skyrocketing to worrying levels, as America leaves its culture of thrift far behind.
A s the nation heads toward a debt-ceiling breach on June 1, both policy-makers and the American populace have understandably focused on the state of the federal debt, currently standing at $31.8 trillion. What’s been lost sight of, however, is a private debt crisis that is almost as severe.
At $16.9 trillion, total household debt stands at record highs in hard-dollar amounts. (As a percentage of GDP, the current 77 percent is still lower than the 100 percent record set in the fourth quarter of 2007.) Credit-card debt reached a new peak of $986 billion at the end of 2022 and held steady in the first quarter of 2023, the first time it hasn’t gone down in the first quarter since 2001. Total mortgage debt sits at $12.4 trillion, higher than its peak during the Great Recession. The average payment on a new car rose to record highs in 2022, and total outstanding debt on auto loans reached a high of $1.55 trillion. Total student-loan debt surpassed $1.75 trillion this year. (President Biden’s relief plan remains on hold, pending a Supreme Court decision.)
This problem is not only one of mathematics. A report released by the National Bureau of Economic Research detailing the effects of the pandemic-era student-loan moratorium on other credit lines found that the pause in student-loan payments led borrowers to increase their borrowing on other items, rather than saving or paying down debt. “For all types of credit, payments and balances increase,” the report noted. “By the end of the sample period individuals with a student loan payment pause owe an additional $1,800 in other debt, and pay an additional $20 monthly.” The majority of this new debt came in the form of new mortgages. These findings suggest that the magnitude of private debt in America stems from something deeper in the American psyche than simple necessity.
Americans have not always been so cavalier about consumer credit. Before World War I, consumer credit did not exist as it is understood in America today. Individual stores offered lines of credit to loyal customers (often in agrarian markets), but modern financial tools were nonexistent, and usury was seen as a last resort. Despite liberalized usury laws coming into play over the course of the 19th century, American culture as a whole looked down on borrowing money extensively, instead preferring savings and thrift. With the advent of the industrial boom in the early 1900s, however, attitudes began to shift. New technologies in the home and workplace opened the door for new expectations of what American life should look like, at home and next door; it is no coincidence that “keeping up with the Joneses” originated as a comic strip during this time. The automobile revolution brought with it new ways of paying for luxuries previously reserved for the wealthy. The 1920s saw new levels of credit spending, up to and including buying stocks on margin, a strategy of borrowing money to invest larger sums into the market — a strategy that became cataclysmic when the market crashed in 1929 and investors couldn’t afford to pay back the loans they had taken out for investments. The Great Depression saw not only a return to thrift (out of necessity) but also new forms of lending, as the modern mortgage came into being.
The major cultural shifts on credit and debt came after World War II. The economic boom that America experienced with the end of the war brought new attitudes toward what a proper American life should look like. Starved for comfort after 20 years of thrift, Americans enjoyed the prosperity peacetime brought with new tools like the credit card. The Joneses returned with a vengeance. American household debt began to grow quickly: The New York Federal Reserve estimates that through the 1950s nominal debt grew 12.5 percent year over year. In 1958, the first non-veteran federal student loans were offered, and in 1965 the passage of the Higher Education Act included the Guaranteed Student Loan Program, opening the door for states and nonprofit agencies to offer loan insurance on student loans.
By the 1990s, the American love affair with credit was in full swing. Over the course of the decade, credit-card debt of the average American family increased by 53 percent. And that figure is just the debt families were willing to report voluntarily. Total outstanding credit-card debt in 2001 was $692 billion dollars, almost tripling the $238 billion reported in 1989. This suggests that Americans were not only incurring more debt than ever before, but also that they were becoming less knowledgeable of how much debt they had incurred — or less willing to admit it. By 1999, total household debt had reached 67 percent of GDP, up from 60 percent in 1990. Debt had become fully entrenched in American life.
The 2000s were no exception to this trend. Total household debt rose to over 100 percent of GDP by the end of 2007. As a percentage of personal income, household debt reached a staggering 120 percent around this time. It is no secret that this rapid increase in debt was driven by the mortgage boom of the early 2000s. From 2000 to 2010, outstanding mortgage debt increased from $6.3 trillion to $13.9 trillion, peaking at $14.8 trillion in the second quarter of 2008. Like the stock-market lending of the 1920s, the results of this unprecedented borrowing were catastrophic for the American economy. The idealized understanding of the American dream of homeownership reached its peak during this time, driven by irresponsible borrowing practices by much of the populace. As David Brooks wrote at the time, the community incentives and changing social norms led America to the position it found itself in during the Great Recession. Keeping up with the Joneses was no longer a suggestion, but a cultural mandate. The standards had changed. As he put it:
Norms changed and people began making jokes to make illicit things seem normal. Instead of condemning hyper-consumerism, they made quips about “retail therapy,” or repeated the line that [Gretchen] Morgenson noted in her article: When the going gets tough, the tough go shopping.
A culture of thrift was fully replaced with a culture of debt.
Today, this culture of debt remains strong. As mentioned above, current household debt stands at nearly $17 trillion. Every category of private household debt reached record highs in the last quarter of 2022. Almost two-thirds of Americans reported living paycheck to paycheck in December 2022, though some of that can be attributed to rising inflation (and, in turn, rising interest rates on the debt they have incurred). Though extensive social spending during the pandemic temporarily boosted the personal savings rate, it has since returned to earth, measuring 5 percent this March. Furthermore, American feelings on debt don’t reflect the reality of American debt today. Seventy-nine percent of Americans think that other people use debt irresponsibly, and 85 percent believe others use debt to live beyond their means. According to the same study, 69 percent of Americans claim that debt is a necessity in their life, and 68 percent said that credit cards have expanded their opportunities. The cognitive dissonance between what Americans think of debt in their own lives and how they view it in other people’s lives is reflective of a culture that does not put its money where its mouth is.
The dysfunction America experiences in D.C. when it comes to the federal debt is troubling and dangerous for the country’s long-term health. But it is not unique to the government, or solely a failure of leadership. Instead, it is reflective of a culture that has become hooked on debt, unwilling and unable to make the hard financial choices it expects others to make.