Economics

Debt, Debt, and More Debt

The National debt clock moves so fast that it is impossible to write down the balance accurately at any given time. Just a few hours ago, it was rolling along at $19,860,685,748,210. That’s trillions of dollars! As much as this staggering figure can tend to overwhelm us, U.S. consumers will pass this debt figure in a few short years.

The Wall Street Journal just ran an interesting article stating that consumer credit card debt has just topped the $1 trillion dollar mark. The total household debt stands at $12.29 trillion dollars. This figure includes $8.36 trillion in mortgages, $1.32 trillion in student loans, and $1.04 trillion in auto loans and over $1 trillion dollars in credit card debt. Americans truly spend like their government.

The Federal Reserve Bank issues a quarterly report called the G.19 in which it reports on Consumer Credit outstanding balances. But it is also ironic that the same Federal Reserve Bank carries almost $4 trillion dollars in financial assets that it has accumulated in the wake of quantitative easing and other stimulus measures over the past few years. Eventually, the Federal Reserve will have to do something with this $4 trillion dollars in assets and hopefully when it does sell these securities back to the banking system, it will not trigger a gigantic inflationary debacle.

We live in a society where debt is a way of life. In the past couple of months, an article recounted a man who accepted every credit card solicitation sent to him. At last count, he had over 40 credit cards and his holdings were still growing. The credit card industry is extremely profitable. Total earnings for the year 2011 for the entire credit card industry was more than $18.5 billion dollars. With Americans charging more than a trillion dollars each year on their credit cards, no wonder it is extremely profitable. Each time a credit card is used, a merchant pays a small fee. In addition, about half of all Americans habitually carry a balance on their high interest credit cards.

Credit card companies charge a fee from $29 to $39 for paying late or going over your credit card limit. The most widely used marketing tool is the zero percent introductory interest rate offer. When the introductory period ends and the interest rate increases to 17% or 19%, credit card companies earn significantly more profit as card holders tend to use the zero percent credit card more often than one charging interest. A second tactic used to increase profits is requiring a minimum monthly payment of only 2% or 3% to encourage card holders to continuously carry a balance so the credit card company can rake in more profit.

To compound the debt situation, we have to add in the millions of retail credit cards that traditionally carry a higher interest rate of 25% to 30%. The number of credit cards just issued from the primary card network of VISA, MasterCard, Amex, and Discover is 636,000,000 (million). The total number of credit cards in use during 2014 was 1.058 billion.

Americans are stuck in a perpetual debt cycle. Most students can’t afford college without a loan; most Americans can’t buy a car without an auto loan or a lease loan; a mortgage is a necessity to purchase almost any house; and the use of credit cards is almost a daily requirement from Starbucks to Walmart. Sadly, the cost of living is exceeding the incomes for most Americans and the only way that they can stay even is to substitute this shortage with credit. But our debt is growing. We, as Americans, are deep in debt. We, as a country, are deep in debt. I don’t personally ever think that I will see the day when we are not deep in debt. The number of our credit score is now more important than anything else. The debt industry is not for the faint of heart as it is an industry of trillions and billions of cards and dollars.

Time will tell.


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About the author

Donald Wittmer

DONALD WITTMER is a retired business executive who held key roles in the automotive and banking sectors. For a time, he also served as a Fiscal Agency Manager for the Detroit branch of the Federal Reserve Bank of Chicago. He received his undergraduate degree from Cincinnati's Xavier University, an M.A. in business management from Central Michigan University, and earned certification in bank operations from the School of Banking at the University of Wisconsin-Madison. A husband, father, and grandfather, he teaches part-time at the Kent Place School for Girls in Summit, New Jersey.

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