Debt Payments of Americans

Dave sends a link to an article about the ever-rising level of consumer debt in the United States, and questions whether average people are good judges of their own economic self-interest:

... consumer credit and mortgage debt are both a higher percentage of disposable income now than they've ever been before. Nor do these rises in debt levels appear justified by the rise in the value of people's homes — household debt as a percentage of household assets (what you owe versus what you're worth) has also never been so high, according to the Federal Reserve. [source]

A graphic included with that article shows "consumer credit as a percentage of personal income" as 19% in 2003.

Consumer credit is the wrong numerator. Thanks to the Federal Reserve, we're in an extremely low interest rate environment, so carrying a large debt today is easier than it was in the past. (I refinanced my mortgage at 5% this year; interest rates are as low as they've been in a generation.) The right metric to look at is debt service payments. A quick check over at economagic yields:

I've read — alas, before I started blogging, so I didn't save a link — that this figure (debt service as % of disposable income) is remarkably constant. It's been in the 12%-14% range for as long as data has been collected. (Economagic's series only goes back to 1980, but I've seen much older figures.)

A rising level of total debt is expected — and yes, rational — when interest rates fall. This is exactly the result the Federal Reserve is trying to achieve.

None of this should be taken to suggest that I think debt is a wonderful idea. I do think people carry too much debt. But the great mass of people in this country disagree with me, and their opinion has been consistent for decades.

I note with chagrin that my personal debt service as percent of disposable income is in the 25%-30% range, hugely higher than the norm. My excuse is that I've got a 15-year mortgage. If I had a 30-year mortgage, I'd be very close to typical.