The American middle class is falling deeper into debt to maintain a middle-class lifestyle.
Cars, college, houses and medical care have become steadily more costly, but incomes have been largely stagnant for two decades, despite a recent uptick. Filling the gap between earning and spending is an explosion of finance into nearly every corner of the consumer economy.
Consumer debt, not counting mortgages, has climbed to $4 trillion—an inflation-adjusted record.
Student debt totaled about $1.5 trillion last year, exceeding all other forms of consumer debt except mortgages.
Unsecured personal loans are back in vogue as tech-savvy lenders and big banks compete to lend.
The Fed’s Role
The debt surge is partly by design, a byproduct of low borrowing costs the Federal Reserve engineered after the financial crisis to get the economy moving. It has reshaped both borrowers and lenders. Consumers increasingly need it, companies increasingly can’t sell their goods without it, and the economy, which counts on consumer spending for more than two-thirds of GDP, would struggle without a plentiful supply of credit.
Why This Matters
In one sense, the growing consumer debt is a vote of confidence in the future. People borrowing money today expect to have the income tomorrow to pay it back.
But the debt pile is also an accumulated ledger of economic risk. It should be manageable so long as unemployment remains low, but repayments could be under threat if people lose their jobs. The Fed lowered interest rates on Wednesday because it sees rising risks of a slowdown that could boost unemployment.
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