The American Household Is Digging Out of Debt in the Worst Possible Way

More
Our long, national deleveraging nightmare might soon be over. After peaking at over $13.6 trillion in late 2008, outstanding household debt has fallen by $833 billion the past four years, albeit for the not-so-good reason that so many people have been foreclosed on. It's the most painful, and perhaps least efficient way, of getting out from under our collective pile of debt, but it's also, ahem, the default way of doing so. It's politically easier not to fight for more writedowns and refis.

The chart below, via Owen Zidar, shows how Americans have shed some debt, and added other kinds of debt, since 2008. It's a bit hard to decipher, but the left side shows the composition of our reduced debt, and the right side the composition of our remaining debt. The story of the post-crash economy has been one of people borrowing to go to school instead of to buy houses. Student loans are up $317 billion. Mortgages are down $1.3 trillion -- with often-underwater households defaulting en masse.

Deleveraging2.png


Deleveraging means the size of our debt falls relative to the size of our income. The ideal way for a country to deleverage would be for incomes to rise faster than debts. The second-easiest (but far from ideal) way would be for practically every household to default on their debt, forcing the banks to lower credit standards, which might encourage people to borrow their next batch as the economy improved.

But what's happened in the U.S. has been a terrible, upside-down amalgam of the two. Rather than rising wages, we've got stagnant wages and low inflation, which makes it hard to pay down debt without cutting spending somewhere else. At the same time, we've seen households default in large numbers, but not so large that the banks have felt forced to lower credit requirements (in fact, they've raised them). The people who owe less than before can't borrow, and the people who can borrow don't owe less than before. 

Hello, anemic growth.

And that brings us to door number three. Between inflation and default, there's loan modifications. More aggressive mortgage writedowns and refinancings for underwater borrowers would speed up the deleveraging process for households that haven't seen much of a raise recently, without the lasting economic damage from default. And, as Amir Sufi of the University of Chicago points out, lower debt burdens would get people spending more, which would reduce unemployment, push wages up, and lower debt burdens even further. In other words, escape velocity.

Remember that?
Jump to comments
Presented by

Matthew O'Brien

Matthew O'Brien is a former senior associate editor at The Atlantic.

Get Today's Top Stories in Your Inbox (preview)

This Short Film Skewers Hollywood, Probably Predicts Disney's Next Hit

A studio executive concocts an animated blockbuster. Who cares about the story?


Join the Discussion

After you comment, click Post. If you’re not already logged in you will be asked to log in or register. blog comments powered by Disqus

Video

A Short Film That Skewers Hollywood

A studio executive concocts an animated blockbuster. Who cares about the story?

Video

In Online Dating, Everyone's a Little Bit Racist

The co-founder of OKCupid shares findings from his analysis of millions of users' data.

Video

What Is a Sandwich?

We're overthinking sandwiches, so you don't have to.

Video

How Will Climate Change Affect Cities?

Urban planners and environmentalists predict the future of city life.

Video

The Inner Life of a Drag Queen

A short documentary about cross-dressing, masculinity, identity, and performance

Video

Let's Talk About Not Smoking

Why does smoking maintain its allure? James Hamblin seeks the wisdom of a cool person.

Writers

Up
Down

More in Business

Just In