In the nearly seven years since the official conclusion of the Great Recession, it has become painfully clear that the anticipated economic recovery has not benefited everyone equally. While some have prospered, many individuals and families remain in dire straits since the crisis of 2009.
Recent reports indicate that U.S. credit card debt has soared to $714 billion in the third quarter of 2015, marking a $34 billion increase from the previous year. One might wonder: shouldn’t the economic rebound have enabled consumers to reduce their debts?
Theoretically, yes—if the recovery stemmed from genuine economic growth. However, the reality is that this recovery has been largely superficial, fueled by low interest rates from the Federal Reserve and speculative financial practices. There has not been a genuine rise in shared prosperity.
Those not involved in sectors like financial services, or certain industry bubbles such as government lobbying, have seen little to no improvement in their incomes or quality of life. High-paying professional jobs lost during the downturn have often been replaced with lower-paying service positions. Consequently, many consumers have resorted to accumulating credit card debt to bridge the gap.
Regrettably, this short-sighted solution only compounds future challenges. As debt continues to rise faster than income, repaying principal amounts becomes an uphill battle. Even making minimum payments grows increasingly difficult as new debts pile on each month.
Playing with Fire
“We’re playing with fire now,” stated Odysseas Papadimitriou, CEO of the credit analysis site CardHub. “Either an unexpected economic downturn or the continuation of current spending and payment habits could trigger a wave of defaults.”
Papadimitriou rightly underscores the precariousness of the current situation and the potential for widespread defaults. However, his remark about an “unexpected” economic downturn fails to recognize that such downturns are part of the natural economic cycle. They are not anomalies but rather expected occurrences.
Historically, the United States has experienced approximately 12 recessions since World War II, with an average interval of around 58 months between them. With the Great Recession officially ending in June 2009, we are now 82 months into the current recovery—a sign that another downturn is overdue, if not imminent.
As per the Atlanta Fed’s GDPNow model forecast, real GDP growth for Q1 2016 stands at a mere 0.6 percent. By the time this piece is read, an updated forecast will likely be available. You can check the latest estimates from the Atlanta Fed here.
In essence, GDP growth remains tepid and current levels of credit card debt are unsustainable. The likelihood of a wave of defaults is already high, and the possibility of an impending recession increases this risk significantly. Thus, a surge in credit card defaults seems all but certain. However, there’s more at play here.
The Other Problem with Debt No One is Talking About
A secondary concern regarding rising consumer debt, which often goes unnoticed, is its direct correlation with expanding waistlines. Historical data suggests a strikingly high positive correlation between the two. But why is this the case?
While the precise reasons remain unclear, it appears to be linked to a growing lack of discipline. For instance, the tendency to charge a new flat-screen TV aligns with the choice to supersize a sugary drink. Both choices reflect a disregard for moderation.
Saving up to purchase a TV instead of charging it, or opting for a regular drink instead of a jumbo size, reflects a level of self-control that seems increasingly absent from our debt-ridden culture. Notably, the federal government is perhaps the most egregious offender, continuing to operate with a massive budget while accruing an annual deficit of half a trillion dollars to sustain its operations.
Promises made by politicians for a comfortable retirement and subsidized medications echo the accumulation of consumer debt. Much like this debt, these commitments accumulate monthly, adding to a figurative pile of dead wood, waiting for a single spark to ignite them into a catastrophic inferno.
Sincerely,
MN Gordon
for Economic Prism
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