So much of what you hear about the recent economic trends of people learning grand lessons about avoiding debt, are just not true.
While the level of unsecured consumer debt has decreased over these past four years, it’s not as if that was some grand American consumer awakening. No, that was the result of poor economic times and a lack of consumer confidence.
People, of every country, are attracted to the marketing messages and shiny things that we are told will make our lives better. For some, saving and frugality are a religion but for most, right now, it’s just a necessity.
I’ve said since this economic decline started, just wait till it’s over and consumer spending will ratchet up again, it always has.
But one component that is different this time that poses a significant risk to unsecured consumer credit and spending is the crisis behind student loans. The level of student loan debt has now exceeded the amount owed on credit cards and with student loans not dischargeable in bankruptcy, there is no real mechanism to free those consumers from that unmanageable debt to allow them to spend again.
As you can see, non-revolving consumer debt, which includes student loans, is accelerating away from revolving consumer debt.
Call bankruptcy what you want to, the reality is it is an economic cleansing tool to help return people to participants and “consumers” from an otherwise dark hole. And don’t even get me started on the myth about the immorality of bankruptcy or that bankruptcy should be a last resort. Nothing could be further from the truth.
But both Visa and MasterCard look forward to a rebounding if the American consumer to spending. They want it to happen. That’s how they generate greater returns.
Greg McBride, a senior financial analyst for Bankrate.com recognizes the logjam of potential spending to come if people can believe in a better financial future.
McBride says, “It’s not like the American consumer has gotten religion about paying down debt and saving.” – Source
The entire economic system is configured for consumers to be confident enough to spend again. The system is designed so banks lend, consumers consume, manufactures make stuff and then more stuff and we repeat the cycle.
Spending is more pleasurable. Period. And while some will have learned some fundamental lesson about avoiding debt there are enough up and coming people that will never have much of a recollection about the hardships we currently face that the cycle will repeat again.
In my generation our parents were depression era children. They learned lessons from far harder times. They lived with going without, some being homeless, and struggling for work. They endured rationing during World War II. Yet the children of that generation went on to fuel the crazy borrowing days of the 1990s and 2000s.
Returning to consumption will become the norm again. People will consume again given the opportunity or excuse. Debt relief company services will be needed again in the future and at some point the economy will collapse again. The current economic times are difficult but will happen again at some point.
American’s want to spend. Just take a look at the percentage change of unsecured consumer debt, on an annual basis. As you can see, while there are peaks and valleys between 1989 and 2007 the overall trend is positive, more so in the early 1990s but still going in the early 2000s.
Now take a look at the trend over the past few years. While the drop was steep, the trends on the percent change of revolving consumer debt has been heading back towards a more normal pattern since 2010. It’s just taking time.
So let’s not kid ourselves that the future has fundamentally changed and frugality is the new mantra. Spending is the mantra, always has been, always will be. The question is really, how long will it take for American’s to “perceive” the future looks better so they can spend future income again by taking out credit.