You have heard all of the good news from the candidates – “Elect me and All is Well!” – but it is time to re- visit an old headache. Not that I like being the bearer of bad news, but I like to follow economic trends, and this one’s a doozy.
At the end of May, the financial pages were reporting that U.S. households will owe as much at the end of this year as they did at the peak of borrowing in 2008 – if trends continue in the final seven months.
Now, I don’t know if you remember 2008, so let’s take a little quiz: What was the most memorable event of 2008?
A) Sen Barack Obama lost his historic presidential bid to Gov. Sarah Palin.
B) The State ofCalifornia seceded to Mexico.
C) The Cardinals went unbeaten, winning 178 straight games and their 12th World Series title.
D) The world economy went higgeldy-piggeldy, making many of us wonder if we would be bartering chickens for gasoline.
Of course, D is the answer – at least, I think California is still with us – geographically, if not spiritually. I realize that much of the economic crisis had everything to do with “too big to fail” and “subprime debt” and “credit default swaps” – but it also came down to, in its most basic format, people like you and me who bought homes nicer and bigger than we could afford – often because bankers told us we could afford them.
OK, not really like you and me – or most Midwesterners, but you would think we would all have learned our lesson.
But there is not a lot of hand-wringing going on about our growing household debt. Compared to the rest of the economy, US debt is way down.
But even with low rates, the cycle of borrowing and rolling over loans, will eventually exact a cost. People, and governments, enjoy spending now and paying for things later….which can cost companies who don’t have anything to spend later.
U.S. households owed $12.25 trillion at the end of the first quarter of this year, according to the Wall Street Journal. Second question of our quiz: Who’s fault is this?
A) Pres. Obama.
B) Barack Obama
C) The President of the United States.
D) All the above.
Hmmmm… maybe, but perhaps not.
Every time the economy is about to go off the cliff, we want to blame the desk where “the buck stops here,” but despite what Pres. Harry Truman said, sometimes the buck doesn’t even make it to the president’s desk.
This year is different than 2008, though. Interest rates are stuck near zero so for nearly all households, debt payments are, as a percentage of household income, the lowest since 1980.
But here’s the problem down the road – and our final quiz question: Why worry?
A) No worries! Let’s party like it’s 1980!
B) Pres. Obama will be out of office and we can expand our economy by building walls and things.
C) Pres. Obama will be out of office and the first female president will be holding the checkbook.
D) Teenagers will want to go to college to have fun on their parent’s dime.
Ha! Trick answers!
None of them, or all of the Could be correct.
The hurdle for this year’s economy has to do with that college – or how to pay for it.
The stress of today’s economy is student debt, which is now 10% of household debt – twice what it was in 2008.
The ability to pile to pile on debt with few consequences leads to complacency, one expert has said. At some point you have to pay the piper.