How Consumer Debt In The U.S. Has Affected The Recession

Among all the news about the falling stock market, corporate bailout, and lavish CEO bonuses, there’s a macroeconomic trend that’s not being discussed: consumer debt.

In macroeconomic terms, consumer debt is debt that comes from the purchase of goods that are consumable and do not appreciate in value. A lot of economists view consumer debt as a good thing because it drives economic growth. Consumer debt is a good way to increase demand for consumer goods. After all, consumer spending drives about 70 percent of the nation’s economic activity.

Examples of consumer debt include credit card debt, student loans, and auto loans.

However, consumer debt can also be a bad thing. It even played a part in the recession. When the national unemployment rate started to climb in 2008, it became increasingly difficult for many people to repay their outstanding debt. Because many consumers carried a lot of debt with little to no savings, they stopped spending so much money and started pinching pennies. That means severely cutting back on credit card spending and taking out far fewer bank loans than usual. Not only that, but some people even defaulted on their credit card agreements and bank loans. Statistics have shown that about 4.5 percent of cardholders were 60 or more days late in their credit card payments.

Because people weren’t giving them money, banks and other financial institutions everywhere suffered. They weren’t getting as much revenue as they needed, so they turned to the federal government to bail them out of their debt hole with our own tax dollars.

To keep this same mistake from happening, banks, credit card companies, collection agencies, and other financial institutions started to tighten their own belts. Banks cut back on consumer lending. Regulations over credit cards increased and credit standards were tightened due to the Dodd-Frank Wall Street Reform Act. Interest rates became higher and higher.

At this point, consumers had less access to money. That made the economic activity in the consumer goods market slow down. Businesses began to cut expenses and reduce the workforce. That reduced consumers’ ability to spend money even further, because people were either laid off or reluctant to spend money because they

Economists believe that as long as consumers hold onto their purse strings, we’ll remain stuck in recession.

However, here’s some good news: the economy seems to be picking up a little! For the first time since the recession hit the United States, consumers are beginning to take on more debt. Many economics see this as a good sign, because consumers are finally showing confidence again. The Federal Reserve reported that consumers increased their borrowing by $14.2 billion in October from September. $10.8 billion of that money went to auto and student loans while $3.4 billion went to credit cards.

If this keeps up, the United States might see a healthy recovery in the near future.

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By Simon Andras (SimonTheSorcerer)

This article was written by Simon from Simon’ Blog Park.