- Research from the International Monetary Fund found that ConsolidationNow high levels of household debt exacerbate and extend recessions.
- There is a pre-Great Recession level of household debt in the United States.
- There was a $500 billion increase in household debt in the second quarter, reaching $12.84 trillion.
Consumer debt levels are currently far higher than they were before the Great Recession, notwithstanding the apparent stability of the US economy.
According to the latest data from the Federal Reserve, US households were more than $500 billion in debt a year ago as of June.
Reserve Bank of the United States
The overall household debt today stands at $12.84 trillion, which is about two-thirds of the country’s GDP.
In the second quarter, the percentage of the total debt that was past due remained stable at 4.8%. Still, the New York Fed issued a warning about the “significant” increase in the number of people whose credit card balances were in default.
Contrary to government debt, which may be renewed indefinitely, consumer debt must be repaid. Despite the Federal Reserve’s official interest rates being low, many financial products, such as credit cards and small-business loans, do not benefit from these low rates.
Market analyst company 720 Global’s Michael Lebowitz believes that the US economy is on a catastrophic collapse.
“The vast majority of customers, particularly those in the bottom 80%, are exhausted,” he said. “They’ve borrowed everything they’re allowed to. This debt will operate as a dampener on economic growth for the foreseeable future. Inflation will continue to escalate unless wages can keep pace with it.”
This year’s Global Financial Stability Report by the International Monetary Fund devotes two chapters to household debt. It concludes that high amounts of debt counterintuitively tend to prolong and deepen economic downturns.
IMF notes that when debt levels are already high, “increases in family debt regularly [suggest] increased risks.”
A 30 percent GDP threshold for a negative macroeconomic impact on households’ debt levels was the starting point in the study of household debt and macroeconomic consequences.
We in the United States have already beyond that stage. The International Monetary Fund (IMF) predicts that as family debt grows, GDP growth and consumption drop, and unemployment will rise.
“There is a positive correlation between changes in household debt and actual gross domestic product.
Positive growth, and a negative correlation with future GDP growth, “is stated in the document.
Over three years, an IMF-estimated 5 percent rise in household debt to GDP results in a 1.25 percent decline in future real GDP growth.
According to the International Monetary Fund, “housing collapses and recessions preceded by higher rises in family debt tend to be more severe and long-lasting.”
Is there a way to fix this? According to the IMF, debt forgiveness is an option if things become bad enough. It’s a win-win situation for everyone, even creditors.
As the research points out, “we show that government interventions may assist avert lengthy contractions in economic growth.”
A few historical examples cited by the IMF include “bold family debt restructuring initiatives such as those conducted in the United States during the 1930s and currently in Iceland”.
Thus, interventions such as these may help forestall self-reinforcing cycles of family defaults, more significant housing price drops, and subsequent production contractions.”
The latest global downturn coincided perfectly with an increase in household debt in several nations. These are some eye-opening numbers: To put it another way, the ratio of household debt to income increased by 39 percentage points in advanced countries during the five years before 2007. The International Monetary Fund (IMF) reported that household debt in Denmark, Iceland, Ireland, the Netherlands, and Norway peaked at more than 200 percent of family income.
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