1990-2012: An Economic Analysis of United States Consumer Debt Levels Relative to Annual Household Wages/Income & the Impact of the nations Economy as measured by CPI & GDP
Table of Contents
Effects of Consumer debt levels on the financial institution. 3
Effects of consumer debt levels on money supply. 4
Effects of consumer debt levels on the economy. 4
Introduction
Consumer debts refer to debts owed in the course of purchasing consumable goods with no ability to depreciate. This indicates that the consumers accumulate consumer debt levels through the procurement of the consumable goods. The illustration of the consumer debt levels demonstrates the lack of depreciation of the consumable goods because they are short-term products applicable in the satisfaction of the human wants and preferences. One of the fatal results of ineffective management of the consumer debt levels is the essence of bankruptcy. This demands quality, and efficient management of the consumer debt levels in the United States to limit or reduce essence of bankruptcy or insolvency in the interaction with other companies and stakeholders. High level of consumer debts is detrimental to the common individual in relation to the management and execution of regular payments.
This is because high level of consumer debts contributes towards the increase in the quantity of pressure or strain on the available resources at the disposal of the individual. This makes it difficult for the household to make regular payments thus economic burden. Despite these negative outcomes in relation to the concept of consumer debt, high levels of consumers’ debts have the potential of being beneficial to individuals under particular circumstances. This is because the accumulated debts in relation to the purchasing pattern of the consumer will contribute towards the improvement of the procurement power of the household. For instance, the process of financing a vehicle would be beneficial to the consumer in case he or she has plans to attend to the demands of a higher paying employment opportunity. This research will focus on the evaluation of the levels of consumer debts in relation to the wages or income of the households in the United States from 1990 to 2012. This entails focusing on the trend of the consumer debt levels in the United States while outlining it effects on the consumers, financial institution, economy, and money supply.
Statement of the Problem
Consumer debts refer to the debt incurred by consumers in the process of purchasing consumable goods. This is through accumulation of the debts on the consumable commodities that do not depreciate. High levels of consumer debts make it difficult for consumers to make regular payments because of the several reasons. Several factors contribute towards the development of high level of consumer debts. These factors include loss of job or employment opportunity, divorce cases, illness, or the act of welcoming a new baby to the family or society. Such conditions make it difficult for individuals to survive on the scarce resources available at their disposal thus resorting to borrowing (Barnes & Young p. 206).
Consumers borrow from relevant financial institution in order to pay the debts owed to the creditors. Borrowing is also essential in the making of payments for the household bills. This does not reflect an effective or best option to consumers because of the strains and pressure on the available resources thus making it difficult for individuals to make regular payments. The effects of the consumer debts are intriguing because of the inclusion of several adverse aspects such as anxiety, mental illness, suicide, and relationship breakdown. The main factor behind the development of the consumer debts in the United States, like any other nation across the globe, is the lack of financial awareness to the consumers.
Effects of Consumer debt levels on the financial institution
Consumer debt levels increase the number of risks in relation to the procurement of loans from the financial institutions. This relates to the inability of the individuals or consumers to repay back the debts to the creditors following increment in the borrowing processes. In case the consumer fails to settle his or her debts, the financial institution will take serious measures such as confiscation of the assets of the borrower. Financial institutions also reduce their provision of portfolios in case of high levels of consumer debts. The consumer debt levels also affect the participation of the financial institution in relation to the provision of financial information or awareness programs to the consumers. Financial institutions also contribute to the development of consumer debts through the integration of low interest rates in relation to the procurement of personal loans.
Effects of consumer debt levels on money supply
In understanding the role of consumer debt in the concept of the money supply, it is essential to demonstrate the aspect of money multiplier. Simple economic rule indicates that the spent money on consumption does not end at the store. It is also essential to understand that large proportion of the gross domestic product applicable in the measurement of economic growth relates to the spending course of the consumers (David & Nicholas p. 153). This is an indication that even small degree in the spending habit of the consumer has the ability to influence the relevant sectors in the United States. This is an indication increment in the level of spending increases the level of revenues at the business levels. The application of the revenues results in more jobs increasing the level of spending within the economy. This indicates that consumer debts have a positive relationship with the money supply within the economy.
Effects of consumer debt levels on the economy
Consumer debt levels have a negative effect on the economy. This is because one of the factors behind the increase in the levels of consumer debts is the loss of employment thus ailing the course of recession within the economy. Currently, the United States’ economy suffers from adverse impacts of the consumer debts thus affecting the growth and development of the relevant sectors within the nation. The economy of the United States is one of the leading vibrant economies across the globe. The effect of consumer debt level is intense and massive because of the size of the economy and the level of interactions of the sectors within the United States.
Background
The growth of the United States debt burden proves to be a popular topic of debate. Some of the economic analysts indicate that the benefits of the consumer debts relates to the increase in the availability of the credit thus encouraging Americans to be homeowners. This is a reflection of greater liquidity to in relation to the purchasing power for the satisfaction of the human wants and preferences. Some economists subscribe to the argument that the increase in the levels of consumer debts does not pose serious threats. This is because the increment in the wealth of the United States contributes towards the creation of hedge in relation to the debt holdings or the consumer debts (Todd et al p. 768).
Despite this positive reflection, some analysts view increase in the level of consumer debts as a major issue. In accordance with these arguments, there is immense fear in the increase, in the number of consumers unable to pay their debts to creditors. These analysts believe that the process would result into massive losses to the lenders or the financial institution. The financial institutions focus on the provision of funds to the borrowers for certain conditions and situations. An increase in the level of consumer debts will increase the level of risks on the actions of the financial institutions in the provision of funds to the consumers. These economists also highlight the notion of the intimate knot between the net earnings of consumers and the housing market. This action or relationship would lead to serious challenges and obstacles to the consumers (Kish p. 2).
According to a survey conducted by the end of 2005, the consumer credit outstanding with exclusion of the mortgage was estimated at about $ 2.1 trillion. This was equivalent to a debt of about $ 9, 710.69 for every American over the age of 18 (Kish p. 3). The inclusion of the mortgage debt indicates an increase in the level of consumer debt to about $ 51, 062.02 for every American aged 18 and above. In the latest recession period, in the history of the United States, there was no indication of the reduction of the levels of consumer debts thus adverse effects in the efforts towards the minimization or elevation of the situation of the economy.
The trend also indicates an increase in the level of personal bankruptcy as a reflection of the increment in the level of consumer debts. In 2005, approximately 1.6 million consumers within the economy of the United States filed for bankruptcy (Kish p. 4). This is a reflection of double cases of personal bankruptcy in comparison to the examination of the cases in the 1990s. Analysis of the overall illustration of the correlation between annual real consumer credit in relation to the Americans above the age of 18 was approximately 0.87 between 1991 and 2004 evaluations (Kish p. 4). Evaluation by the Wall-Street journal indicates that the concept of insolvency affects the middle-aged consumers adversely more than any other group with the United States’ economy. This differs from the notion that the process adverse affected the younger generation in the previous decades thus transformation of the effects of consumer debts on the economy.
Another element in the evaluation of the consumer debt levels in the United States is the adoption and integration of the concepts of household liabilities in comparison to the net worth. In the evaluation of the household debt burden, it is ideal to note the essence of the increment in the debt-to-income rations for the better part of the last five decades (Cox et al, p. 197). It is a challenge to determine the real debt burden without effective considerations of the events in relation to the liabilities and assets. According to the analysis of 2005, the ration of the household liabilities in comparison to the net worth attained the record high in the final fiscal quarter evaluation.
Despite the results showing a rapid increase in the early 2000s, there has been narrow relationship between the household liabilities and the concept of the net worth according to the evaluation of the recent years. The rapid increase in the ratio in the early parts of the 2000s might be down to the boom, in the housing market. The denominator of the ratio (net worth) demonstrates elements of increase to above 24 percent from the evaluation in 1999 (Cox et al, p. 199). This is a reflection of the increase in the value of house holdings. Despite this increase, the ratio of liabilities in relation to the net worth also increased because of the upward surge of the mortgage debt in the same period of evaluation. There has been consistent illustration of the consumer liabilities in the past 29 years as a share of the net worth exclusive of the mortgage debt.
Another common trend and analysis of the consumer debts in the economy of the United States is the application of the debt service ratio (Dynan et al, p. 422). This perspective is most applicable in the examination of the status of the household debt for the effective use by the Federal Reserve policymakers. The ratio is essential in the determination of the disposable income applicable in the payment of the consumer debt and relevant aspect of mortgage. There was a decline in the debt service ratio in relation to the examination of the condition of the economy of the United States, in 2005. Despite this decline, there were still elements of record high in the context of the values of the ratio of debt to service as examined in 2005. According to the evaluations of the previous studies, it is essential to note the contribution of several factors in the enhancement of the levels of consumer debts. It is essential to note that the studies elaborate on the quantification of the effects of consumer debts in relation to numerous aspects within the society. Examination of the previous studies and perspectives indicates that consumer debt continues to draw effective debate in the evaluation of its benefits and costs in the context of the economy of the United States. The increase in the home ownership is a reflection of the rapid increase in the level of consumer debts from 1990 (Kish p. 16).
Results & Analysis
According to the findings and evaluation of the consumer debt level in the United States economy in the 2012, there is a reflection of the reduction of the burden on the consumers. This relates to the high values in the 1990s and early parts of the 2000s. This is an indication of the boom in the housing or real estate market thus making the consumers perform activities they have wished for: reduction of the consumer debt level. Through the course of the 1990 to 2012, the concept of the consumer debt levels in relation to low wages and GDP has been a painful experience to the financial institutions and borrowers. This is because of the relevant cases of closure, insolvency, or bankruptcy to the borrowers and the lenders with the aim of making regular payments. The course of the consumer debt levels were also aided through the massive economic recession in 2008. These forced borrowers to take more money than they thought would be essential for the satisfaction of their wants.
The process towards the reduction of the consumer debt levels decreases at a faster rate in comparison to other nations such as Britain and Spain. The comparison is essential because such European nations also experienced plunging prices in relation to the real estate. One of the essential measures in the context of the financial health of the consumers is the application of the level of financial obligations. In the evaluation of the financial obligations in 2007, the result approximated about 14 percent of the level of income after tax (disposable income).
This was the highest value of the financial obligations in relation to the values calculated by the Federal Reserve as from 1980. The evaluation of the latest values of the consumer debts with reference to financial obligations indicates the turn of events to the positive aspect of the economy. The examination of the last quarter of the year recorded 11 percent as part of the disposable income. This is a reflection of the lowest portion since the examination in 1994. The inclusion of the obligations such as taxation system on the property and insurance premiums for the owners of the real estate, and substantial rent for consumers who do not have the home ownership also reflected lowest value.
This is in comparison to the values from the evaluation in 1984. There is a greater possibility of this value of the consumer debt of $ 2.77 trillion to increase in the course of this year. This follows massive increase in the borrowing by the consumers towards the end of 2012 with the aim of purchasing vehicles and paying the school fees. There is an illustration of the increase in the level of the consumer borrowing to about $ 15.2 billion in relation to the settlement of the school fees and procurement of cars for the employment purposes. The aspect of the credit card debt in the context of the United States was about $ 1.03 trillion in 2009. By the end of last year, the value had dropped with a massive 16 percent (Murphy p. 306).
Increase in the level of the consumer debt in the United States affects the economy in various ways. One of the essential ways in which consumer debt contribute adversely to the economy of the United States is the development of cases of unemployment. This follows the closure of business entities due to accumulation of intolerable debts thus losses of jobs (Kartik p. 18). The individuals who lost their jobs because of the aspects of insolvent trade or bankruptcy decided on taking new carrier paths thus the increase in the cost of education. Consumer debts also reduce the participation of the consumers towards the development of the GDP.
This is because employment and monthly income contribute significantly to the development of the economy thus relevant for the calculation of the GDP. Increase in consumer debt also limits the ability for consumers to borrow more money for the application in development (Gross p. 324). This leads to reduction in the monthly income thus minimization of the level of disposable income. This contributes towards the increase of burden or strain on the consumer with reference to the making of the regular payments. Another impact of the consumer debt is the development of psychological problems such as suicide because of increment in the level of stress and anxiety resulting from enormous debts. High levels of consumer debts also reduce the borrowing power of the nation at the international level.
This is because consumer debts contribute in the calculation of the public debt thus poor performance of the relevant sectors within the economy. Increase in the level of consumer debts is also an indication of the increment in the money supply. This indicates that many financial resources are in circulation because of the constant and increased level of borrowing within the economy. It is the duty of the government and the financial institutions to offer relevant financial information in order to increase the awareness of the consumers on the concept of borrowing. This will contribute towards the minimization of the consumer debt levels thus the opportunity to enhance the performance of the economy.
Summary
Consumer debts refer to the accumulation of debts by consumers in relation to the procurement of the consumable goods and services. Consumers have incurring needs and preferences making them to require financial resources for the execution and satisfaction of the wants. This forces them consumers who have the limited resources to seek more funds from the financial institutions or individual entities. The accumulation of this debt forms the concept of consumer debt thus exerting the burden on the individuals while making regular payments. This is a contributing factor towards the decrease in the real income or disposable income, insolvency, and bankruptcy. Several individuals lose their jobs and business because of the effects of consumer debts on the performance of the economy. The examination of the consumer debt in the United States demonstrates a reduction in value as compared to the initial determination in the 1990 with exception to 2007. This is mainly because of the boom in the housing market and industry within the context of the United States.
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