Household debt has reached a new all-time high, and while the data do not indicate an imminent economic collapse, the debt binge cannot endure forever.
Total household debt reached $12.73 trillion as of March 31, eclipsing the previous record of $12.68 trillion set during the third quarter of 2008, the Federal Reserve Bank of New York’s latest “Quarterly Report on Household Debt and Credit” revealed. Among the major debt categories, mortgage balances accounted for $8.63 trillion, followed by $1.34 trillion in student loan debt, $1.17 trillion in auto loan debt, $764 billion in credit card balances and $456 billion in home equity lines of credit.
While the debt bubbles began to reinflate after the aftermath of the Great Recession, the composition of that debt has changed, with mortgage debt making up a smaller share and debt from auto loans, and especially student loans, much higher.
Student loan debt continues to be problematic. While about 4.8 percent of all debt was in some form of delinquency, student loan delinquency remained substantially higher, with 11 percent of aggregate debt 90 or more days delinquent or in default. Moreover, as the New York Fed report explained in a footnote, even this significantly understates actual student loan delinquency rates “because about half of these loans are currently in deferment, in grace periods or in forbearance and therefore temporarily not in the repayment cycle. This implies that among loans in the repayment cycle delinquency rates are roughly twice as high.”
This expansion in debt “is more of an intended feature than a flaw of the Fed’s monetary policy since the housing bubble popped,” Mises Institute fellow Jonathan Newman maintained in a post after the New York Fed’s previous quarterly report. “Expansionary monetary policy can only replace bubbles with new bubbles. Malinvestments are not totally liquidated, but shift from one sector to another. Consumer debt is not directly paid off, but transferred from one type to another.”
“The redirection is mostly guided by new government interference in markets,” Newman continued. “Pre-2008, federal government programs to encourage new housing and mortgages, along with the low interest rates and new money from the Fed, created the housing bubble. Since 2008, programs like Cash for Clunkers, auto manufacturer bailouts and income-based student loan repayment have funneled spending, borrowing and increasing prices into education and autos.”
One chief reason the New York Fed data is not cause for immediate alarm, however, is that it is not adjusted for inflation. While total debt has increased 14 percent since the recent trough of 2013 — which came after a five-year period of Americans working hard to pay down their debts during and after the recession, bucking a 63-year upward debt trend — it now constitutes about 67 percent of gross national product, compared to more than 85 percent in 2008, a Wall Street Journal article noted.
Nonetheless, the easy money and credit expansion party can only last so long, as we rudely discovered just a decade ago. With the increase in household debt, people pouring money into stocks that are at record highs and the national debt now up to about $20 trillion, it seems we still haven’t learned this lesson.