Consumer Credit Falls By Record Amount in November

This is good news. People need to stop spending money they don’t have. I understand perfectly well this means that spending will go down (which will likely lead to reduced economic output – though technically it doesn’t have to, a reduction in imported goods could more than offset the reduced spending and GDP would not decline). Living beyond your means is not a good thing. We should hope that consumer debt continues to decrease. If that means we have some suffering today to pay for living beyond our means for years the “fix” is not to continue to live beyond our means. The “fix” is to accept the consequences of past behavior and build a more sustainable economy now for the future.

Ideally this decrease can be someone gradual, abrupt changes in the economy often cause problems, but far too many economists and policy makers only care about today and the next 6 months. They have been living this way for decades. And it is not sustainable. Consumer debt levels in the USA are far too high. The UK has an even worse personal debt problem. They should come down. Reducing those levels is good for the individuals involved (they gain most of the benefit) and also for the health of the economy (though it does decrease the current economy a bit while making the foundation for future economy much stronger).

Now you will see many news stories that say there was a 3.7% decrease. Those stories sure seem to imply debt was reduced 3.7% but I know that can’t be true, that would be a huge amount for one month. In fact the Federal Reserve reported the seasonally adjusted percent change in consumer debt decreased by 3.7%. Now if you are not an economist and that intuitively makes sense to you, congratulations.

But what was the actual change in consumer debt in November? Debt declined from $2,578.9 billion to $2,570.9 billion. So that means outstanding debt declined by $8 billion, or .31%. It would take 322 months, 26.9 years, to pay off the debt at that rate (reducing it by $8 billion a month). Now the truth is there is a difference between the debt level for an entire economy and for one person. It doesn’t really make sense to look at the entire consumer debt being paid off. But looking at that does help give you a picture of what level of reduction in debt we are talking about, it is hardly as dramatic as some are painting it to be.

Related: Consumer Borrowing in U.S. Falls Record $7.9 Billion – $2,540,000,000,000 in USA Consumer Debt (April 2008) – USA Consumers are Drowning in Debt – personal loans

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