Debt Increases As A Result Of Short Memories

Debt Increases As A Result Of Short Memories

By |November 27th, 2012|

Debt rises in good timesWe’re spending more money we don’t have.  Clearly, things are looking up in the economy.

Over at Calculated Risk there’s a discussion of how household debt exclusive of real estate has jumped 2.3% to $2.7 trillion during the third quarter of 2012.  The Federal Reserve Bank of New York shows that that the rise in debt was due to a boost in the following:

  • student loans ($42 billion);
  • auto loans ($18 billion); and
  • credit card balances ($2 billion).

We’re spending more money, incurring more debt, and forgetting where we were a few years ago.

That’s not good.

Good Times Means More Debt

Donghoon Lee, senior economist at the New York Fed, hit the nail on the head by saying that an “increase in mortgage originations, auto loans and credit card balances suggests that consumers are slowly gaining confidence in their financial position.  As consumers feel more comfortable, they may start to make purchases that were previously delayed.”

That’s not out of line with history.  In fact, when you’re making less money you tend to horde it a bit more.  There’s less available cash, so you are less likely to fritter it away.

Once the financial tide turns, however, you feel less uneasy about meeting your monthly obligations.  You’re secure in the fact that there’s going to be a paycheck coming in, so you go out and buy that new computer or book that vacation.  You’ve got the ability to pay the debt over time, so there’s no stress.

Plus ça Change, Plus C’est La Même Chose

We’ve been here before, time and time again.  The game of financial musical chairs always ends, and it sucks.  But it begins again eventually, and we’re happy to play with vigor.

As much as we hope otherwise, the cycle of capitalism is one of boom and bust.  The booms may go longer, the busts may be shorter or less extreme – but they are inevitable.

We forget that, don’t we?  When the Internet bubble was making us all giddy in the early part of the century, we forgot.  When the railroads were being having a day in the sun, we forgot.  And when real estate was where it was at, we forgot.

But those who forget the past as doomed to repeat it, as they saying goes.

Hedge Your Bet To Save Your Future

Here’s the bad news – if you want to keep from getting burned in the next economic downturn, you’re going to have to save a little money now.  It doesn’t need to be a ton of money, either.  Just $20 or $50 a pay period, socked away in a saving account that’s not attached to your debit card, will be fine.

You won’t make enough to retire, but it will be a cushion if you hit the brick wall financially.  A job loss, medical issue or other financial calamity will be easier to take.  Your family won’t be tossed into the streets, and you won’t end up as just another statistic.

Image credit:   TWITT Photography

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About the Author:

I've been a consumer protection lawyer since 1995, working to help people end their bill problems. I'm a faculty member at the Student Loan Law Workshop, a nationally recognized speaker, and a long-time member of both the National Association of Consumer Bankruptcy Attorneys and National Association of Consumer Advocates.