Dec 15, 2009 -- Consumer debt reduced for a record nine consecutive months
CLARKONOMICS: The Federal Reserve reports that Americans have reduced the amount of money they're borrowing for a record nine consecutive months.
If you go back a little over a generation ago, we borrowed around 60 cents on every dollar relative to our income. Yet just two years ago, at the peak of our modern financial madness, we were borrowing up to 136 percent of annual income.
The latest figures look like we're down to between $1.24 and $1.26 of borrowing on every dollar we earn. It's not where we should be, but it's definitely along the right lines.
Our problem has long been extreme consumer consumption. Historically, we bought 17 million cars every year when we only needed about 10 million replacement cars. And we overbuilt our retail sector. It was all fueled by a seemingly endless supply of borrowed money.
The canary in a coal mine was our level of personal bankruptcy, which rose to new record levels year after year. It got to the point that one in every 70 families filed for bankruptcy. Our lives were priced for perfection because of our "no money down" consumer lifestyle.
Some of our current debt reduction is because we simply can't borrow anymore. The teller windows are all closed! But a bigger share is because many have learned a new discipline with money to avoid the anxiety and problems of carrying too much debt.
Now, economists cynically say that people's memories are short and we'll be borrowing/spending fools again. However, it is Clark's hope that the cynics are wrong. It's impossible to control the overall American psyche. Just control your own financial house by continuing to reduce debt in your life.
Meanwhile, The Wall Street Journal reports that the new Credit Cardholders Bill of Rights mandates that lenders take prudent steps to make sure you have income to pay back debt before they extend new credit. This provision could eliminate instant in-store financing. Retailers are all riled up and lobbying hard to prevent that. Let's hope the politicians have enough sense to shut the retailers down.
