Consumer Debt Continues To Increase…WTF?

By: ispeculatornew
Date posted: 11.12.2013 (5:00 am) | Write a Comment  (0 Comments)

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I understand many of the arguments behind it. The economy is fragile, many households have at least 1 unemployed person. Real estate has risen so much in the past few decades that consumers have been forced to take higher mortgages. I also understand that as a general rule, we are much more into spending to get the latest Apple product, that brand new car, etc. All of those things have clearly created a situation where not only local, state and national governments are taking on excessive debt but so are households.

The last time I checked, getting out of debt was much more complicated for consumers. They generally cannot simply raise their income as governments do with theirs (through taxes and others), have limited ability to get more credit, etc.

What Has Caused This?

I guess many different elements could be blamed. I would blame marketing firms for finding our weak spots by creating the new, hot products that we’ve gotta buy. Having that iPhone from a few years ago has became so “lame”. We always try to get the most recent tech gadgets even if we cannot really afford them.

Critical Flaw

Another point is that they have figured out one critical human flaw. We are very poor judges of the future value of money. Many consumers would never pay $3000 for that brand new tv even if they had the money available. Give them possibility of paying $50 per month over 5 years though and they’ll jump all over it. It’s crazy but true. Using credit has made it so much easier for consumers to buy things without feeling like they were actually spending that money. Many studies have proved exactly that. Similar stories exist in the investing world of course. All investors hate to lose money but for some reason they feel better about it if they keep their position, knowing that they can make it all back (never mind the fact that they could lose even more).

The Impact:

A picture is worth 1000 words….

HouseholdDebtPercentGDPQ42009

As If Things Weren’t Bad Enough…

Individuals are also investing a lot less than they used to:

The overall impact of course is that households are now poorer, especially when you adjust for inflation….

But doesn’t it all come down to one simple equation?

Earn > Spend

And ideally, do not take on more debt than you would if you were paying right away. What are your thoughts on this?

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