Line chart and statistical table of us personal income, total household debt outstanding, home mortgage and consumer credit in us$ constant, 2005=100, percent change and per capita from 1976 to 2009. While income grew at an average annual rate of 3%, total debt grew at 5.2%, mortgage at 5.8% and consumer credit at 3.9%. The covariances of the annual percent changes are near zero, suggesting that debt growth is unrelated to income growth.

Household debt gained momentum in 1993 (beginning of Clinton's first term), broke the personal income ceiling in 2003, and took a steep ascension until the 2008 financial crash. The growths of personal income on one hand and, on the other hand, of total debt outstanding, mortgage, or consumer credit are unrelated (covariances near zero): borrowing is disassociated from financial capability.

The scenario presents unique features:

As a consequence, most households were short of discretionary income and unable to fuel the 5.87% annual economy growth. To overcome the scarcity of income of the vast masses, the latter were provided with financial resources through lending, irrespective of actual income capabilities. Key instruments have been mortgages that include loans made under home equity lines of credit, also used for consumer purposes, and consumer credit that includes revolving credit, mostly credit card lending.

Unsurprisingly, the 21st century witnessed the free ride of mortgage, including home equity credit. Mortgage and income became disassociated. Their correlation still strong in 1982 (r=0.9), significantly weakened in 1985 (r = 0.63), took a tumble in 1999 (r=0.5) and vanished in 2004 (r=0.14). Credit card lending, another popular form of credit, went from 15.73% in 1976 to 54.43% of other consumer credit loans in 2009. Other factors contributed to the increase in indebtedness during the same period, such as the accelerated rise of university fees that could only be met with heavier student loans. Debt, not income based consumption, became the driver of economic growth.

It was in fact a rotten apple. Debt nurtured the "subprime crisis" that triggered the financial meltdown that caused the 2009 economic recession. The major economic indicators turned upside down. Borrowing, both mortgage (-2.5%) and consumer credit (-4.0%), reverted the trend too. However, the average household, struggling with shrinking incomes and evaporating jobs, remains tied to financial obligations, including debt service and other payments such as car leases, home rentals and insurance, amounting to 17.76% of disposable personal income (2009 Q3).

Will the havoc made by the inequality of income distribution and indebtedness be as short-lived as their benefits have been?

 

Personal Income & Household Debt Outstanding
(USA, 1976-2009)

Year

Population

Personal Income

Household Debt Outstanding
Total

Home Mortgage

Consumer Credit

Personal Income

Household Debt Outstanding
Total

Home Mortgage

Consumer Credit

Personal Income

Household Debt Outstanding
Total

Home Mortgage

Consumer Credit

US$ billion (constant 2005=100) Percent change Per capita, US$ (constant 2005=100)
2009307,006,55010,99712,4029,3752,295-2.5%-2.5%-2.5%-4.0%35,82040,39630,5387,475
2008304,374,84611,28212,7179,6162,3890.7%-1.8%-2.6%-0.5%37,06541,78131,5947,850
2007301,579,89511,19812,9499,8722,4032.6%3.7%3.7%2.7%37,13242,93832,7347,967
2006298,593,21210,91312,4869,5162,3394.1%6.6%7.5%0.8%36,54741,81631,8717,833
2005295,753,15110,48611,7178,8492,3202.1%7.5%9.6%1.1%35,45539,61629,9207,844
2004293,045,73910,26910,9018,0762,2943.0%8.2%10.6%2.7%35,04237,19827,5607,827
2003290,326,4189,96610,0797,3042,2341.3%9.4%11.9%3.1%34,32734,71525,1597,696
2002287,803,9149,8359,2126,5262,1680.4%9.0%11.5%3.9%34,17432,00722,6747,532
2001285,081,5569,8008,4515,8542,0871.5%7.2%8.1%6.2%34,37529,64320,5347,320
2000282,171,9579,6567,8845,4141,9645.9%6.9%6.4%9.7%34,21927,93919,1886,961
1999272,690,8139,1177,3715,0901,7913.6%6.8%7.7%6.2%33,43427,03218,6656,566
1998270,248,0038,8016,9044,7251,6866.3%6.6%6.8%6.0%32,56525,54617,4856,237
1997267,783,6078,2796,4784,4221,5904.4%4.0%4.3%3.7%30,91824,19216,5155,937
1996265,228,5727,9336,2314,2411,5334.3%4.9%4.2%7.0%29,91123,49215,9905,781
1995262,803,2767,6055,9384,0701,4333.4%4.6%2.7%12.1%28,93822,59315,4895,452
1994260,327,0217,3555,6743,9631,2793.3%5.4%3.4%12.9%28,25421,79515,2234,911
1993257,782,6087,1185,3823,8331,1331.9%3.7%3.3%5.1%27,61320,87914,8714,395
1992255,029,6996,9875,1883,7111,0783.8%2.9%4.0%-1.2%27,39620,34214,5514,226
1991252,153,0926,7305,0423,5671,0910.3%1.7%3.5%-4.5%26,69119,99714,1484,327
1990249,464,3966,7134,9603,4471,1422.4%3.9%6.1%-1.9%26,90919,88113,8184,577
1989246,819,2306,5564,7743,2501,1643.8%5.1%6.0%4.6%26,56119,34313,1684,717
1988244,498,9826,3164,5443,0671,1124.2%6.8%8.6%3.1%25,83418,58312,5424,550
1987242,288,9186,0604,2542,8221,0793.2%5.5%7.8%1.9%25,01017,55811,6494,452
1986240,132,8875,8734,0312,6191,0593.4%9.0%11.2%6.8%24,45516,78910,9064,409
1985237,923,7955,6793,6992,3549923.8%13.8%13.2%12.5%23,86815,5489,8954,168
1984235,824,9025,4693,2522,0798816.7%8.1%7.3%14.1%23,19313,7888,8183,736
1983233,791,9945,1253,0071,9387722.6%5.7%4.1%7.9%21,92212,8618,2883,304
1982231,664,4584,9932,8451,8617161.0%-1.4%-2.6%-1.1%21,55312,2808,0323,090
1981229,465,7144,9452,8861,9117242.6%-1.3%-1.5%-3.5%21,54812,5778,3303,153
1980227,224,6814,8202,9231,9407502.4%0.3%2.7%-7.5%21,21212,8668,5393,299
1979225,055,4874,7062,9161,8898103.5%6.6%7.7%5.2%20,91112,9578,3943,600
1978222,584,5454,5462,7361,7547715.1%9.1%9.8%9.8%20,42512,2937,8803,462
1977220,239,4254,3242,5081,5977024.1%8.7%9.6%8.7%19,63511,3867,2533,186
1976218,035,1644,1552,3071,457645    19,05810,5836,6812,959
Average annual change rate 3.0%5.2%5.8%3.9%        

 

Sources: US Federal Reserve, US Census Bureau.

 

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