Authored by Wolf Richter via WolfStreet.com,
I’m shedding a different light on consumer debt...
This type of chart is trotted out constantly these days to show that American households are in fabulous shape when it comes to their ability to service their blistering record debts. The red line in the chart shows household debt-service payments (combined monthly payments on mortgages, credit cards, auto loans, and student loans) as a percent of disposable (after-tax) income. Since 1980, the ratio has ranged from 9.9% to 13.2%. It hit that top in Q4 2007 just before it all came apart. Ten years later, it was at 10.3%. Hence the conclusion that households won’t have any trouble servicing their record debts. In a moment, we’ll get to the trap in this conclusion.
The chart above also shows separately the ratios of mortgage-debt-service to disposable-income (brown line) and of non-housing consumer-debt-service to disposable-income (blue line). Both combined make up the red line.
These debt-service ratios are a function mostly of three factors: The dollar amount of the debt; the interest rate on that debt; and the amount of disposable income. The logic is that rising disposable income supports rising indebtedness.
The large decline of the debt-service ratio from the peak of 13.2% in Q4 2007 to the all-time low in the data of 9.9% in Q4 2012 was caused by several factors:
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Consumers “deleveraged” mostly by shedding their debts via defaults and bankruptcies.
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Homeownership dropped to lows not seen since the 1960s. As households became renters, their mortgage debts were eliminated.
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Mortgage debt plunged by $1.2 trillion, or by 11.3%, from $10.6 trillion in 2007 to $9.4 trillion at the end of 2014. It has since risen to $10.1 trillion.
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Non-mortgage consumer debt dropped by $150 billion or 5% by late 2010, as student loans continued to surge while auto loans and credit card debt experienced sharper declines. It has since surged 47% past the prior peak.
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Interest rates also plunged. This allowed the remaining homeowners to refinance at a lower interest rate, and it allowed homebuyers to get lower-interest-rate mortgages. Interest rates on many consumer loans also dropped.
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Disposable income rose from $10.7 trillion at the end of 2007 to $14.6 trillion at the end of 2017 (not adjusted for inflation), largely due to an additional 9.2 million jobs and nominal wage gains.
It all looks good, in terms of the debt burden. And so the red line in the chart above is trotted out to show that the American consumer – this unified, amorphous, monolithic structure whose job it is to hold up the entire global economy – is strong and won’t buckle.
But there’s another way to look at this -...