Our Culture of Debt

Our Culture of Debt

Keith Greiner

October 10, 2016

We have a culture that values the acquisition of consumer goods and other material things. To obtain those things, people use credit. In a dramatic change from the early 20^th century personal philosophy of purchasing only those things for which one already has the cash, people now use credit cards, mortgages, and short term loans. Since 1943, the seasonally adjusted amount of total consumer credit in the United States increased a whopping 555%. The following graph shows the Federal Reserve’s data series.

The use of debt does two things. First, it allows consumers to obtain things. Second, it costs those consumers additional resources to obtain the debt. The purchase of money, debt, comes at a price. The price is the additional interest paid to lenders for the use of their money. The payment of interest takes away from consumers’ ability to add to their savings accounts. Instead of increasing wealth, consumer debt gets things for consumers, but also redirects limited resources away from savings and other valuable items.

As the collective use of debt increased since WWII, so the collective rate of savings decreased. The following graph shows the percentage of consumer credit as a percentage of disposable and savings as a percentage of disposable income. Notice that in 1943 and 1944 the rate of savings as a percent of disposable income was a 28%. That savings rate was the American consumers’ collective contribution to U. S. success in WWII. No similar commitment has occurred since 1944. Instead, the patterns of debt and savings as a proportion of disposable income show a pattern of reduced savings and increased debt. Early published estimates of the savings ratio after 2006 showed a continued decline, and the increase shown here was introduced after revisions were made by Bureau of Economic Analysis. Therefore, it is still possible that the savings trend will continue downward, and most certainly it will not soon reach the 1944 level. That is the essence of our culture of debt.