Debt Continues to Rise While Savings Slide

Posted by Rana & filed under General Debt & Loan Consolidation Information.

By, Credit card debt is increasing everyday in the U.S. with consumer borrowing increasing significantly in May 2007, the biggest rise in six months. The Federal Reserve Bank stated this Monday that consumer credit climbed at an annual rate of 6.4 percent in May. This rise in consumer credit is enormous since the 1.1 percent increase in the month of April.

Consumer credit includes credit card spending which increased in May at the rate of 9.8 percent, while in April there was an increase of only 0.2 percent. The May increase was the largest jump in credit card debt since a 14.5 percent rate of increase in November 2006.

It may be that the tightening lending practices in the housing arena may be contributing to the increase in credit borrowing. The saga of subprime mortgages, home foreclosures, and persistent defaults in home loan mortgages continue. The lenders are being more selective on disbursement of home equity loans forcing some consumers to use their credit cards.

Either scenario is not really palatable. If you have to get a second mortgage such as a home equity loan to purchase something or perform debt consolidation then you must seriously evaluate your financial picture. Many people consolidate their debt to lower their monthly bill payments and interest rates; some take advantage of payday cash advance loans and other options to stop their financial hemorrhaging. But the concern with credit card spending comes at a point when you are spending more than 20 percent of your take-home pay on servicing them.

This is a frightening figure, as scary as the national personal saving rate. In February 2006, the federal government reported a personal savings rate of minus 0.5 percent, meaning Americans spent all they earned and then some.

This is the lowest saving rate in 74 years. The national personal saving rate has only been negative twice before, in 1932 and 1933 during the Great Depression. For many years, majority of Americans have had high consumer debt, low savings rates, and increased borrowing.

The national personal savings rate is a consequent of subtracting Americans’ total consumption spending from their total after-tax income or “disposable income”. Hence, the rest is defined as “saving.”

Ideally, you should be saving between ten to fifteen percent of your take home income. The double digit savings have not occurred since 1984, when the personal saving rate, savings as a share of disposable income was 10.8 percent. The saving rate has been going down ever since.

Historically, from 1980 through 1994, the national saving rate averaged 8%; subsequently, it fell steeply. In 1995, the saving rate was 4.6 percent and in 2005 zero percent. Dissimilarly, the national personal saving rates from 1980 through 2001 averaged 12% in Germany, 13% in Japan, and 15% in France. And, since 1994, these countries have had no steep declines in the savings rate. Our neighbor in the north, Canada’s national saving rates averaged 16% from 1980 through 1994. Also, for over a decade, consumer expenditure has normally surpassed growth in personal income, leading to a downward spiral in savings.

Consequently, we should be concerned over increasing consumer debt and decreasing savings. A primary concern related to the low saving rate is that we have the inability to sustain levels of domestic investment critical to long-term economic growth without infusion of and dependence on foreign capital.

Since 1982, the U.S. national savings rate has consistently under funded domestic investment, hence requiring infusion by foreign investors to sustain the economy; meanwhile the Canadian economy has had fully funded domestic investment since 1996. However, on the flip side fo the savings coin is that continued consumer spending drives out national economic growth and in many cases sustainability. If the personal savings rate were to increase, meaning Americans were to start saving more, consumption would have to fall, which could have significant implications for the growth of the economy. This can be a serious issues during a recession, increasing its depth and length. Do we as a nation want to relinquish our economic future to pay for excessive consumption today?

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