Household debt has reached a new all-time high, and while the data do not indicate an imminent economic collapse, the debt binge cannot endure forever.
Total household debt reached $12.73 trillion as of March 31, eclipsing the previous record of $12.68 trillion set during the third quarter of 2008. Among the major debt categories, mortgage balances accounted for $8.63 trillion, followed by $1.34 trillion in student loan debt, $1.17 trillion in auto loan debt, $764 billion in credit card balances and $456 billion in home equity lines of credit.
This expansion in debt "is more of an intended feature than a flaw of the Fed's monetary policy since the housing bubble popped," Mises Institute fellow Jonathan Newman maintains. "Expansionary monetary policy can only replace bubbles with new bubbles. Malinvestments are not totally liquidated, but shift from one sector to another. Consumer debt is not directly paid off, but transferred from one type to another."
"The redirection is mostly guided by new government interference in markets," Newman continued. "Pre-2008, federal government programs to encourage new housing and mortgages, along with the low interest rates and new money from the Fed, created the housing bubble. Since 2008, programs like Cash for Clunkers, auto manufacturer bailouts and income-based student loan repayment have funneled spending, borrowing and increasing prices into education and autos."
One chief reason the New York Fed data is not cause for immediate alarm, however, is that it is not adjusted for inflation.
Nonetheless, the easy money and credit expansion party can only last so long, as we rudely discovered just a decade ago. With the increase in household debt, people pouring money into stocks that are at record highs and the national debt now up to about $20 trillion, it seems we still haven't learned this lesson.
Editorial on 05/27/2017