Household Debt is Down, but What Does That Mean?

Household debt to GDP

Household debt is down. Way down. After steadily increasing from 2000 until the end of 2009 (during the freewheeling economic bubble), American households are down to approximately owing 83% of GDP. The good news is the number is continuing to shrink.

Not only that, according to the Washington Post (“Five economic trends to be thankful for”), the cost of servicing that debt is also down. Previously, American households were spending more than 14% of their disposable income on debt repayments. Now, they only spend 10%.

This is great news. Households, rather than chaining themselves into stagnation through crippling interest repayments (which don’t help American workers at all), are able to spend that money doing things that give regular people paychecks.

This plot (from the Calculated Risk blog), though, makes the picture a bit more nuanced, however.

Nearly all the reductions in debt are due to declines in the amount of money owed on mortgages. Student loan debt, however is increasing. This is partly good. People are likely living in houses more inline with market prices and what they can afford. At the same time, unemployment is sending more and more people back to school.

While I’m all about people getting educated, I can’t help but think our phenomenon of skyrocketing tuition is merely shifting the debt from one sector to another.

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About Pete Larson

Assistant Professor of Epidemiology at the Nagasaki University Institute for Tropical Medicine

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