Drowning in Debt?
Americans' love affair with plastic may have a messy ending if interest rates rise
Like millions of Americans, Cathy and Scott Gabrielsen got used to a certain standard of living in the late 1990s, when times were flush and their Internet stocks were going gangbusters.
So when times toughened as the stock market bubble burst at the start of this decade, the couple took a risk: They chose not to cut back. "The truth is, nobody wants to sacrifice their lifestyle," says Cathy, 34.
Despite steep losses in their portfolio, the Gabrielsens continued to upsize during the bear market. The couple--parents of two boys, now ages 5 and 3--bought a 4,000-square-foot house in West Chester, Pa., near Philadelphia. That's double the size of their previous home. Then they had to furnish all that empty space.
They also upgraded their cars--Cathy, who works part time in sales, went from a Ford Bronco to a Volvo station wagon, while Scott, 40, a commercial real-estate broker, moved from a 5 Series BMW to a pricier 7 Series.
Eventually, the expenses led to something else that was new: debt, including credit card balances. "It wasn't like hundreds of thousands of dollars," says Cathy. "But when it gets to be $10,000 or $15,000, you start to get concerned."
The Gabrielsens aren't alone in their concern. Consumers and economists alike are looking over their shoulders at a growing American mountain of debt. Just how worried should most families be about what they owe? At the very least, economists fear that the indebtedness of the all-important consumer threatens U.S. economic growth, already slowed by record-high oil prices.
Household finances, like the economy, tend to run in cycles. Usually, when times are good, families assume things will be good forever, so they spend more and save less. When times get tough--as they did in the mid-'70s, early '80s, and early '90s--consumers tighten their belts, saving more and borrowing less.
Belt loosening . But in the most recent downturn, starting with the bear market of 2000 and the recession of 2001, belts didn't get tightened. In fact, they were loosened.
Household debt rose from 96 percent of personal disposable income (consumers' take-home, spendable cash) in 2000 to 111 percent in 2003 to 113 percent at the end of 2004." Just the fact that it's growing isn't necessarily a problem," says Scott Fullwiler, an economics professor at Wartburg College in Waverly, Iowa. "My concern is that as a percentage of disposable income, it's at an all-time high."
At the same time, the savings rate--that's savings (not including home equity or investment gains) as a percentage of disposable income--has plummeted. It fell to 0.6 percent in May, down from as high as 3.4 percent in 2001 and 7.9 percent in the early 1990s.
Americans are saving less partly because they are spending more, often because it has been so cheap to borrow money to do so.
As the Federal Reserve Board scrambled to pump life back into the economy at the start of this decade, interest rates tumbled to historic lows. Borrowing to buy cars, furniture, and homes became a bargain.
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