Economists analyze consumer debt as one of the major indicators of the overall health of an economy. Long-term stability requires stable debt levels. When credit card debt starts to rise, there are several implications.
Increased Consumer Spending – Good or Bad?
Many people correctly assume that consumer spending, in whatever form, is good for the economy. Spending indicates widespread confidence in the economy and circulates money that stimulates new business growth. It also boosts stock market values of retailers. One important distinguishing feature between good and bad consumer spending is the type. Piling up debt on credit cards, even though it may ignite the economy in the short term, is a terrible strategy for long-term growth. In a viable economy, consumers finance their spending using disposable income rather than by accumulating debt to pay for what they need.
The Next Economic Crisis?
During the 2008 recession, the overall economy lost billions, the stock market crashed, investment firms went belly-up and American homeowners found themselves unable to pay their mortgages. Anxieties over another major crisis are understandable. Inflation and wage disparity fuel consumer debt. As the price of goods and services increase with no adjustment to wages, consumers are forced to acquire debt to cover their expenses. In 2015, US consumers owed credit card companies nearly 900 billion dollars, an amount that has since grown to surpass 1 trillion dollars, according to the Federal Reserve. This trend is expected to continue as wages remain stagnant while the cost of living soars.
Per Capita Income Often Overlooked
When analysts look at the numbers for the entire economy without considering other important data, this can give an unrealistic optimism. The Gross Domestic Product (GDP), which is a macro-level view of the full economy, continues to grow. This might be cause for celebration, but a closer look reveals a crucial problem: The gains in the economy are going disproportionately to the top 10%. Most members of the wealthy group usually invest their gains because they do not need extra income to meet their basic expenses. On the other hand, poor and middle-class consumers tend to spend all or most of their income as soon as they get it, circulating money back into the economy. This is why payroll tax cuts, which benefit salaried employees and wage earners, do more to stimulate the economy than capital gains tax cuts, which mostly benefit wealthy investors.
An increase in consumer debt should worry economic analysts studying the risk factors for another economic downturn.
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