The 2000s have been a turbulent decade. We’ve seen two major asset bubbles burst, two ongoing wars, massive swings in energy prices, a flash crash, and endless speculation on economic armageddon.
This chart depicts the growth and decline of consumer credit outstanding, a figure that includes all debt assumed by consumers with the exception of mortgage loans. As you can see, the level of consumer debt steadily increased throughout the decade until reaching its apex right before the financial crisis. Since then it's been in steady decline.
This chart of finance companies consumer receivables reveals a similar pattern. It displays the amount of money owed by consumers to financial institutions. As you'd expect it's quite similar to the consumer credit chart, with a peak in early 2008 followed by a steady decline.
The chart above displays the household debt service ratio, which is an estimate of the ratio of debt payments to disposable personal income. This represents the percentage of disposable income that the average person uses to pay off consumer and mortgage debts.
The financial obligations ratio is a similar measure that includes automobile lease payments, rental payments on tenant-occupied property, homeowners' insurance, and property tax payments in addition to mortgage and consumer debt payments.
What these charts reveal is that consumers are basically back where they started 10 years ago in terms of the percentage of income they use to pay off debts. In between now and then the household debt and financial obligations ratios rose to a peak in late 2007/early 2008, right before the financial crisis, and have been in decline ever since.
All of these charts follows a basic trend: rising levels of debt until early 2008, followed by a long decline. The financial crisis really did change everything. The early and mid 2000s were a great time to run up credit card debt and buy flashy cars and houses you couldn't afford. But the good times came to an end. They had to because ever increasing borrowing isn't sustainable. A high unemployment rate and lack of available credit is the price we're paying now for all that happy go lucky spending.
There is a bright side though. The economic crisis forced debtors and creditors to change their behaviour. Although it's been painful, we're on our way back to financial responsibility. See the increase in savings rates, which have rebounded from 1% during the housing bubble back to nearly 6%.
The next decade will reveal if lenders and borrowers have learned their lesson, or if they're biding their time until the easy credit starts flowing again.
*Date for the charts in this post is from the Federal Reserve Data Download Program.
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