The numbers are startling, but they don’t lie.
In the first quarter of 2004, U.S. household debt jumped about 11%, the second fastest pace in 15 years. Since 2000, consumer debt has risen by 30% to about $10 trillion.
What does this mean and how can we put it into perspective? The high debt level means U.S. consumers owe more in debt today, per capita, then they ever have in history.
As for perspective, the average U.S. consumer has debt equal to 115% of their annual disposable income. They’ve mortgaged their future.
Another issue is how fast debt is growing compared to income. It’s truly amazing… over the past three years mortgage debt has shot up 50%, while U.S. consumer debt has risen twice as quickly as income. Consumers are ramping up their debt, but their incomes are rising at a much slower pace.
Bank of England governor Mervyn King put it best last week when he said, “When people take out very large mortgages (they are) stretching themselves to the limit in the belief that house prices will always go up to bail them out, that’s a slightly risky assumption to make.”
Too bad our Fed doesn’t give American consumers the same direction. In the U.S., the Fed’s goal has been to get consumers to spend, spend, spend to the point where reality, in relation to what a consumer can really afford, has been lost.
What’s the message in all this? Simple. Don’t be overextended. Accept a debt level you can manage in the case your income stream ceases. Yes, interest rates are low, but they will be moving up soon (money will cost more to borrow) and the debt itself always needs to be repaid. Higher interest rates will also likely put a hold on rising asset prices, so please tread carefully.