Economic Red Flag: Private Sector Debt

Recently, I wrote about the fact that the wealthy were cutting back on spending and it seemed that the middle class was going into debt to fund some of its lifestyle.

An article in “The Wall Street Journal” this week confirms this trend.  (Source:

The article points out that medical care, college, houses and cars have all become more expensive, but incomes have remained relatively stationary.

Debt accumulation seems to be making up the difference.

Consumer debt, excluding mortgages, now stands at about $4 trillion.  That’s an all-time nominal high and an all-time real high after adjusting for inflation.

Mortgage debt dropped after the financial crisis, at least partially due to defaults, but is now rising again.

Student debt has been a statistic I have tracked here closely.  Total student debt is now more than $1.5 trillion.

Automobile debt has exploded over the past 10 years.  It’s up almost 40% over that time frame and is now $1.3 trillion.  According to the article in “The Wall Street Journal”, the average loan size for new cars is up 11% in the last decade even after adjusting for inflation.  Experian reports the average loan for a car is now $32,187.

Bottom line is, that’s a lot of debt.

It’s important to remember that in our banking and economic system debt is money.  One person’s debt is another person or institution’s asset.  Should debt go unpaid, money disappears from the financial system creating a deflationary event.

A deflationary event typically sees asset prices fall.  That’s usually bad news for stocks and real estate.

Increasing debt levels can be sustainable if incomes are increasing proportionately, but the data suggests that incomes are flat.

The article states that median household income in the United States was $61,372 at the end of the calendar year 2017.  That’s per the US Census Bureau.

Adjusting for inflation, that is just above the 1999 level.  Not adjusted for inflation, incomes are up approximately 135%.

Compare that non-inflation adjusted rate increase with the fact that average 4-year tuition rates at four-year, public colleges are up 549% on an inflation-adjusted basis according to the College Board. 

Personal health care expenditures increased by about 276% over the same time frame.

Average housing prices went up 188% over that time frame according to the S&P CoreLogic Case-Shiller National Home Price Index.

It’s simply become much more difficult to remain middle class.

Credit card debt is higher. 

U.S. families that have credit card debt owed an average of $8,390 in the first quarter of 2019.  That’s up 9% from 2015 after adjusting for inflation.

Moving ahead, this will have to be a drag on the economy leading to the deflationary event I described above.

When debt levels rise and incomes don’t, you have an unsustainable scenario.  That’s where we are presently.

And, while there may be more upside, unsustainable situations always change course.

Once again, the words of economist, Herbert Stein ring true, “if something cannot go on forever, it will stop.”

This will as well.

Meanwhile, as the political season is ramping up and politicians are looking to capitalize on these trends, promises are being thrown around like rice at a wedding.

It may be wise to remember the words of Benjamin Franklin:

“When the people find that they can vote themselves money that will herald the end of the republic.”

                                                                                    -Benjamin Franklin

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