Revolving Debt and the Economy

I was reading cyncurry’s article Personal Debt - Is excessive shopping due to peer pressure? the other day, and she asks a thought-provoking question:

is it our moral duty to carry on building debt to keep the economy alive?

I don’t know about it being our moral duty to carry on building debt, but it is definitely a part of the economy that is here to stay. The practice of financing spending isn’t limited to consumers. Year after year, the U.S. Federal Government operates with a budget deficit, and on very rare occasion ends the year with a surplus. The amount of consumer revolving debt pales in comparison to the federal government’s. Of course, being the analytical type that I am, I decided to take a look at the numbers.

U.S. consumer revolving debt increased from $850 Billion in December of 2005 to $902.3 Billion in December of 2006. An increase of $52 Billion or 6.15% (Source: Federal Reserve Board G.19 Release - Consumer Credit). By comparison, the U.S. federal debt increased from $8.17 Trillion in December of 2005 to $8.68 Trillion in December of 2006. An increase of $510 Billion or 6.24% (Source: U.S. Department of the Treasury, Bureau of the Public Debt’s Debt to the Penny History Search). The U.S. consumer does have an appetite for credit, but it’s not nearly as big as Uncle Sam’s!

U.S. consumers do love their credit cards, but credit card spending is actually quite minimal in terms of its contribution to the economy. In 2006, personal consumption expenditures were $9.2 Trillion (Source: U.S. Department of Commerce, Bureau of Economic Analysis). That means that credit cards only contributed about 0.57% towards the gross domestic product (GDP) in 2006. The federal government contributed $2.5 Billion to the GDP in 2006, so the increase in federal debt from 2005 to 2006 represents 20% of the government’s contribution to GDP in 2006.

As demonstrated by the huge amount of debt it has taken on, the federal government has supreme confidence in the sustained growth of the U.S. economy. The debt of the federal government represents a huge portion of its spending, but contributes less to the U.S. economy than consumers do. Although consumer revolving debt does seem like a huge problem, I think we are just fine as it relates to the overall economy. However, I didn’t mention non-revolving consumer debt. As you would expect (since it includes mortgages), it is much higher than revolving debt. At the end of 2006, it stood at about $1.5 Trillion. If there is any trouble with the economic outlook it lies therein, as many Americans have adjustable rate mortgages that are adjusting. But that is another story for another time.

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