Household debt

Household debt is defined as the combined debt of all people in a household. It includes consumer debt and mortgage loans. A significant rise in the level of this debt coincides historically with many severe economic crises and was a cause of the U.S. and subsequent European economic crises of 2007–2012. Several economists have argued that lowering this debt is essential to economic recovery in the U.S. and selected Eurozone countries.[1][2][3]

Household debt in Great Britain 2008-10
Household debt in Great Britain 2008-10

Overview

U.S. Household Debt Relative to Disposable Income and GDP
Household debt relative to disposable income and GDP.

Household debt can be defined in several ways, based on what types of debt are included. Common debt types include home mortgages, home equity loans, auto loans, student loans, and credit cards. Household debt can also be measured across an economy, to measure how indebted households are relative to various measures of income (e.g., pre-tax and disposable income) or relative to the size of the economy (GDP).

The burden of debt can also be measured in terms of the amount of interest it generates relative to the income of the borrower. For example, the U.S. Federal Reserve measures the "household debt service ratio" (DSR), an estimate of the ratio of debt payments to disposable personal income. Debt payments consist of the estimated required payments on outstanding mortgage and consumer debt. The Fed also measures the "financial obligations ratio" (FOR), which adds automobile lease payments, rental payments on tenant-occupied property, homeowners' insurance, and property tax payments to the debt service ratio. Homeowner and renter FORs are calculated by applying homeowner and renter shares of payments and income derived from the Survey of Consumer Finances and Current Population Survey to the numerator and denominator of the FOR. The homeowner mortgage FOR includes payments on mortgage debt, homeowners' insurance, and property taxes, while the homeowner consumer FOR includes payments on consumer debt and automobile leases.[4]

Historical perspective

In the 20th century, spending on consumer durables rose significantly. Household debt rose as living standards rose, and consumers demanded an array of durable goods. These included major durables like high-end electronics, vehicles, and appliances, that were purchased with credit. Easy credit encouraged a shift from saving to spending.

Households in developed countries significantly increased their household debt relative to their disposable income and GDP from 1980 to 2007 — one of the many factors behind the U.S. and European crises of 2007–2012. Research indicates that U.S. household debt increased from 43% to 62% of GDP from 1982 to 2000.[5] Looking at the early years of the 21st century, many industrialized countries, with a notable exception of Germany, experienced a major spike of household debt versus GDP around 2007–8, with the United States leading up to 2007; by 2017, the American ratio was second only to that of the United Kingdom.[6]

U.S. households made significant progress in deleveraging (reducing debt) post-crisis, much of it due to foreclosures and financial institution debt write-downs. By some measures, consumers began to add certain types of debt again in 2012, a sign that the economy may be improving as this borrowing supports consumption.[7]

Global economic impact

The International Monetary Fund (IMF) reported in April 2012:

"Household debt soared in the years leading up to the Great Recession. In advanced economies, during the five years preceding 2007, the ratio of household debt to income rose by an average of 39 percentage points, to 138 percent. In Denmark, Iceland, Ireland, the Netherlands, and Norway, debt peaked at more than 200 percent of household income. A surge in household debt to historic highs also occurred in emerging economies such as Estonia, Hungary, Latvia, and Lithuania. This occurred largely because the central banks implemented a prolonged period of artificially low policy interest rates, temporarily increasing the amount of debt that could be serviced with a given income. The leveraging up fueled a consumption boom that, ironically, boosted GDP in the countries in question, but represented not a sustainable 'boost to aggregate demand' but instead a mere pulling forward of consumption, as people took on new 30-40 year debt to pay for current year expenditures.

The predictable fallout of this policy is the slow growth that these countries are experiencing today. At the time, the concurrent boom in both house prices and the stock market - as the prices of financed and financial assets were bid up by virtue of the same low rates - meant that household debt relative to assets held broadly stable, which masked households' growing exposure to the eventual sharp fall in asset prices. House prices in particular were vulnerable to sharp movements in policy rates in countries in which most mortgages are adjustable-rate, as 30-40 year loans are highly rate sensitive, house purchases are financed at 80-95% of the price, and only 4-5% of homes change owners in a year.

Despite this low volume, the appraisal rules in most countries limit the number of times that a sale can serve as a comp only in terms of time (12 months), not the number of times that a given sale can be used as a comp - because of this, a "cash out refi boom" followed the low-rate-driven-price-increase - this was the primary vehicle through which developed countries' households leveraged up. On the supply side, home builders are also financed at short rates (in the US, Prime). Their cost of capital was effectively cut in half by virtue of the central bank rate cuts, enabling them to overbuild in response to the rise in prices - with all the new supply making the eventual price collapse worse than it would otherwise have been.

In short, the entire episode was straight out of Ludwig von Mises' 'Human Action', Chapter 20, with the new twist that most of the debt was incurred on the consumer side. When rising consumer prices forced the central banks to allow policy rates to rise back up toward market rates, the wind propping up house prices was taken away. House prices immediately declined, ushering in the global financial crisis. Many households, who had reduced their savings out of a belief in the "wealth effect," saw their wealth shrink relative to their debt, and, with less income and more unemployment, especially in the previously booming real estate sector, found it harder to meet mortgage payments. "Strategic defaults" became common, as homeowners with significant negative equity simply abandoned the home and the debt.

By the end of 2011, real house prices had fallen from their peak by about 41% in Ireland, 29% in Iceland, 23% in Spain and the United States, and 21% in Denmark. Household defaults, underwater mortgages (where the loan balance exceeds the house value), foreclosures, and fire sales became endemic to a number of economies. Household deleveraging by paying off debts or defaulting on them has begun in some countries. It has been most pronounced in the United States, where about two-thirds of the debt reduction reflects defaults.

Of note, Germany, in which almost all mortgages carry 10 year pricing, and in which the 10 year interest rate did not decline during the 2000s, no housing bubble occurred at all. Also, in Canada, in which most mortgages are ARMs but 3-5 year, and which experienced a muted drop in intermediate-term rates, the housing bubble was more muted than in neighboring US. [2][8]

United States household debt statistics

Total Household Debt and its Composition
Total Household Debt by Type
US consumer debt
Mortgage, student loan, auto loan, and credit card debt in the U.S.

U.S. household (HH) debt (measured by the FRED variable "CMDEBT")[9] rose relative to both GDP and disposable income over the 1980 to 2011 period.

  • Household debt as a % disposable income rose from 68% in 1980 to a peak of 128% in 2007, prior to dropping to 112% by 2011.
  • Household debt as a % nominal GDP rose from 47% in 1980 to a peak of 94% in 2009, prior to dropping to 77% in 2012.[10]
  • U.S. household debt rose from nearly zero in the 1950s to $13.8 trillion in 2008, before declining to $12.9 trillion by Q2 2012.[11]

Consumer credit outstanding includes credit cards, auto loans, student loans, and other types of household debt, but excludes mortgages. It rose from 14.0% GDP in January 1990 to 18.0% GDP by January 2009. It fell to a trough of 16.4% GDP in July 2010 and was back up to 17.5% GDP by January 2013.[12]

U.S. economic impact

Contribution to the 2008 financial crisis

This increase in debt from 1980 to 2007 enabled spending that stimulated the economy, arguably "papering over" or hiding the sustainable economic growth rate excluding this increase in leverage. This debt overhang then began holding back the economy as consumers paid down debt (which reduces economic activity) rather than spending.[13]

Paul Krugman wrote in December 2010: "The root of our current troubles lies in the debt American families ran up during the Bush-era housing bubble. Twenty years ago, the average American household’s debt was 83 percent of its income; by a decade ago, that had crept up to 92 percent; but by late 2007, debts were 130 percent of income. All this borrowing took place both because banks had abandoned any notion of sound lending and because everyone assumed that house prices would never fall. And then the bubble burst. What we’ve been dealing with ever since is a painful process of 'deleveraging': highly indebted Americans not only can't spend the way they used to, they're having to pay down the debts they ran up in the bubble years. This would be fine if someone else were taking up the slack. But what's actually happening is that some people are spending much less while nobody is spending more—and this translates into a depressed economy and high unemployment. What the government should be doing in this situation is spending more while the private sector is spending less, supporting employment while those debts are paid down. And this government spending needs to be sustained: we're not talking about a brief burst of aid; we’re talking about spending that lasts long enough for households to get their debts back under control. The original Obama stimulus wasn’t just too small; it was also much too short-lived, with much of the positive effect already gone."[14]

In April 2009, U.S. Federal Reserve Vice Chair Janet Yellen discussed the situation: "Once this massive credit crunch hit, it didn’t take long before we were in a recession. The recession, in turn, deepened the credit crunch as demand and employment fell, and credit losses of financial institutions surged. Indeed, we have been in the grips of precisely this adverse feedback loop for more than a year. A process of balance sheet deleveraging [paying down debt] has spread to nearly every corner of the economy. Consumers are pulling back on purchases, especially on durable goods, to build their savings. Businesses are cancelling planned investments and laying off workers to preserve cash. And, financial institutions are shrinking assets to bolster capital and improve their chances of weathering the current storm. Once again, Minsky understood this dynamic. He spoke of the paradox of deleveraging, in which precautions that may be smart for individuals and firms—and indeed essential to return the economy to a normal state—nevertheless magnify the distress of the economy as a whole."[15]

The policy prescription of Ms Yellen's predecessor Mr Bernanke was to increase the money supply and artificially reduce interest rates. This stoked another debt and asset bubble. Mr Krugman's policy was to ensure that such borrowing took place at the federal government level, to be repaid via taxes on the individuals who he admitted were already overburdened with their own debts. These policies were arguably a mere return to the policies that inflated the debt bubble in the first place.

Economists Atif Mian and Amir Sufi wrote in 2014 that:

  • Historically, severe economic downturns are almost always preceded by a sharp increase in household debt.
  • U.S. household spending declines were largest in geographic areas with a combination of higher household debt and larger price declines.
  • When housing prices fall, poorer homeowners (with a larger proportion of their net worth in their home) are hit the hardest financially and reduce their consumption relatively more than wealthier households.
  • Declines in residential investment preceded the recession and were followed by reductions in household spending and then non-residential business investment as the recession worsened.[3]

Effects on economic growth

Ezra Klein wrote in August 2011: "[W]hat distinguishes crises like this one from typical recessions is household debt. When the financial markets collapsed, household debt was nearly 100 percent of GDP. It’s now down to 90 percent. In 1982, which was the last time we had a big recession, the household-debt-to-GDP ratio was about 45 percent. That means that in this crisis, indebted households can’t spend, which means businesses can’t spend, which means that unless government steps into the breach in a massive way or until households work through their debt burden, we can’t recover. In the 1982 recession, households could spend, and so when the Federal Reserve lowered interest rates and made spending attractive, we accelerated out of the recession. The utility of calling this downturn a “household-debt crisis” is it tells you where to put your focus: you either need to make consumers better able to pay their debts, which you can do through conventional stimulus policy like tax cuts and jobs programs, or you need to make their debts smaller so they’re better able to pay them, which you can do by forgiving some of their debt through policies like [mortgage principal reduction] or eroding the value of their debt by increasing inflation. I’ve heard various economist make various smart points about why we should prefer one approach or the other, and it also happens to be the case that the two policies support each other and so we don’t actually need to choose between them. All of these solutions, of course, have drawbacks: if you put the government deeper into debt in order to help households now, you increase the risk of a public-debt crisis later. That’s why it’s wise to pair further short-term stimulus with a large amount of long-term deficit reduction. If you force banks to swallow losses or face inflation now, you need to worry about whether they’ll be able to keep lending at a pace that will support recovery over the next few years. But as we’re seeing, not doing enough isn’t a safe strategy, either."[16]

Economist Amir Sufi at the University of Chicago argued in July 2011 that a high level of household debt was holding back the U.S. economy. Households focused on paying down private debt are not able to consume at historical levels. He advocates mortgage write-downs and other debt-related solutions to re-invigorate the economy when household debt levels are exceptionally high.[17] Several European countries also had high household debt levels relative to historical averages leading up to the European sovereign-debt crisis. Recent research also supports the view that excessive household leverage has contributed to the weakness in consumption.[18]

Effects on employment

Rana Foroohar wrote in July 2012: "[R]esearch shows that the majority of job losses in the U.S. since the Great Recession were due to lower consumer spending because of household debt, a decline that resulted in layoffs at U.S. firms. Parting back debt is the precursor to greater spending and greater growth."[19]

Effects on economic recovery

Neil Irwin explained the economic effects of rising consumer credit outstanding (i.e., all types of household debt other than mortgages) in July 2013: "Americans are finally feeling more confident about the economy and thus willing to take on debt. Lenders, meanwhile, are growing more comfortable extending loans. The spending enabled by this rising consumer debt can help create a virtuous cycle in which more demand for goods and services creates more jobs, which creates rising income. Indeed, more borrowing by households (and the spending that results) is likely offsetting some of the pain caused by federal spending cuts and deficit reduction."[20]

Reducing household debt

Household debt can be challenging to reduce. Major approaches include:

  • Paying down debt over time from income or accumulated savings, if available
  • Debt write-down or refinancing via negotiation, bankruptcy or government bailout
  • Inflation, although if wage increases do not exceed inflation, this approach is mostly academic

Paying off debt from income or savings

Since most middle income households have the majority of their wealth invested in their home, paying down debt from income can take a decade or longer when a housing bubble bursts, as it did for much of the developed world in 2007–2012. For example, this debt accumulated over a 30-year period (1980–2007 peak) in the U.S. and much of the increase was mortgage-related.

Debt restructuring or write-down

Debt can sometimes be reduced by negotiation with creditors or by a legal bankruptcy process, which can result in dismissal of certain types of debt such as credit cards. Some lenders may agree to write down mortgage values (reducing the homeowner's obligation) rather than taking even larger losses in foreclosure.[21] Economist Joseph Stiglitz argued for a rapid bankruptcy process for homeowners, to allow debts to be written down.[22]

Economists Joseph Stiglitz and Mark Zandi both advocated significant mortgage refinancing or write-downs in August 2012. They explained that more than four million Americans lost their homes since the housing bubble began bursting in 2006. An additional 3.5 million homeowners are in the foreclosure process or are so delinquent on payments that they will be soon. Roughly 13.5 million homeowners are underwater (in negative equity), meaning they owe more than their home is now worth, increasing the odds that millions more will lose their homes. The household debt and foreclosures are significantly holding back the economy.[23]

Economists Kenneth S. Rogoff and Carmen M. Reinhart wrote in April 2013: "In the United States, we support reducing mortgage principal on homes that are underwater (where the mortgage is higher than the value of the home). We have also written about plausible solutions that involve moderately higher inflation and “financial repression” — pushing down inflation-adjusted interest rates, which effectively amounts to a tax on bondholders. This strategy contributed to the significant debt reductions that followed World War II.[24]

Professor Luigi Zingales (University of Chicago) advocated a mortgage debt for equity swap in July 2009, where the mortgage debt would be written down in exchange for the bank taking an interest in future appreciation of the home upon sale (a debt-for-equity swap).[25] Fund Manager John Hussman also advocated debt-for-equity swaps for households and banks during April 2009.[26]

Journalist Steven Clemons wrote in July 2012: "The Great Recession of 2008–2009, from which there are still repercussions in the US and global economies, resulted from a massive surge in consumer loans—98% in just five years—and ... the combined total of US business and consumer loans is basically at the same level as at the moment this crisis hit." He argued for debt forgiveness or restructuring to help stimulate the economy.[27][28]

During the Great Depression, the U.S. created the Home Owners Loan Corporation (HOLC), which acquired and refinanced one million delinquent mortgages between 1933 and 1936.[29]

Inflation

If wages increase due to inflation, but debts remain fixed, the debts can be more easily repaid. Economists may advocate increasing inflation to help reduce the debt burden in highly leveraged economies. For example, economist Kenneth Rogoff has advocated both mortgage write-downs and inflation during August 2011: "I argued that the only practical way to shorten the coming period of painful deleveraging and slow growth would be a sustained burst of moderate inflation, say, 4–6% for several years. Of course, inflation is an unfair and arbitrary transfer of income from savers to debtors. But, at the end of the day, such a transfer is the most direct approach to faster recovery. Eventually, it will take place one way or another, anyway, as Europe is painfully learning." He also suggested that the government could take an equity interest in the homes in exchange for paying down the mortgages.[30]

Charts of U.S. household debt variables

Household over-indebtedness

While it is challenging to define over-indebtedness, definitions of over-indebtedness tend to have a few core elements in common. The first one refers to the capacity to meet the expenses associated with the contracted financial commitments. Over-indebtedness implies an inability to meet such recurring expenses. Second, this inability is structural. This is the time dimension, which holds that the definition must capture persistent and ongoing financial problems and exclude one-off occurrences that arise due to forgetfulness, for instance. The third core element refers to standard of living. The household must be unable to meet contracted commitments without reducing its minimum standard of living expenses. Fourth, comes illiquidity. The household is unable to remedy the situation by recourse to (financial and non-financial) assets and other financial sources such as credit. Lastly, all contracted financial commitments are included, among them mortgage and consumer credit commitments, utility and telephone bills as well as rent payments (recurring expenses).[31]

Causes of over-indebtedness can be diverse. A 'risky life event' (for example, unemployment, relationship break-up, leaving the parental home, business failure, illness or unexpected home repairs. Such events can trigger income and expenditure shocks) can lie at the root, sometimes instantly turning indebtedness into over-indebtedness. Other households have unconsciously, or consciously, gradually become over-committed. They make use of available forms of credit, sometimes without realizing that they might not be able to repay in the future. Lack of financial management skills and aggressive marketing by lenders may both lie at the origin of this. Another potential cause includes escalating consumption habits. The third group of people are the least well-off. They need to obtain credit in order to attain a reasonable standard of living. They are frequently subject to relatively high interest rates. Potential consequences for the over-indebted household include financial hardship, depression, poor health, relationship breakdown, exclusion from basic financial services, a strain on social relations, absenteeism at work and lack of organizational commitment, a feeling of insecurity.[32]

Responses to household over-indebtedness can be preventive, alleviative and rehabilitative. Preventive measures include financial education and regulation. An example of the last is the European Union’s "Directive on Credit Agreements for Consumers Household debt advisory services". It stipulates, for example, that lenders should list the interest rates they change in a homogenized way (yearly rates) and that paper contracts should be signed for debts above a certain amounts, thus inhibiting for example impulsive borrowing through SMS-loans. Alleviative measures include debt advisory services, which aim to help households getting their finances back on track, mainly by means of information provision, budget planning and balancing, help with legal arrangements, negotiation with creditors, providing psychological support by having someone to talk to, and even by effectively, voluntarily taking over the managing of a household's finances. Rehabilitative measures include consumer bankruptcy and legal debt settlement procedures. While precise arrangements vary largely between countries, in general such procedures work as follows. During such procedures, the over-indebted household hands over all income above a minimum threshold to the creditors/state and is cleared of its debts after the period, varying in length from for example 1 year in the UK to 5 in Portugal and 12 in Ireland.[33]

External References

References

  1. ^ NYT-Paul Krugman-Block those Metaphors-December 2010
  2. ^ a b IMF-Report Extract Chapter 3 – April 2012
  3. ^ a b Mian, Atif and, Sufi, Amir (2014). House of Debt. University of Chicago. ISBN 978-0-226-08194-6.
  4. ^ U.S. Federal Reserve-Household Debt Service and Financial Obligations Ratios
  5. ^ Federal Reserve Bank of Chicago, Welfare Implications of the Transition to High Household Debt, November 2006
  6. ^ . Graphics by Nicolas Rapp. "10 Years after the Great Recession, New Threats Have Appeared". Analytics: Seeing Trends in the Data. Fortune (Paper periodical): 11. 1 October 2018.CS1 maint: others (link)
  7. ^ NYT-Rise in Household Debt Might Be Sign of a Strengthening Recovery-Annie Lowrey-October 2012
  8. ^ McKinsey-Debt and deleveraging: The global credit bubble and its economic consequences-Updated-July 2011
  9. ^ Fred Database-CMDEBT Variable-Retrieved July 2012
  10. ^ FRED-Household Debt as Percent of GDP-Retrieved September 2013
  11. ^ U.S. Federal Reserve-FRED Database-Retrieved July 2012
  12. ^ Federal Reserve Database-Consumer Credit as % GDP-Retrieved July 2013
  13. ^ Project Syndicate-Joseph Stiglitz-To Cure the Economy-October 2011
  14. ^ NYT=-Paul Krugman-Block those Economic Metaphors-December 2010
  15. ^ Federal Reserve-Janet Yellen-A Minsky Meltdown-April 2009
  16. ^ Washington Post-Ezra Klein-It's the Household Debt, Stupid-August 2011
  17. ^ Bloomberg-Household Debt is at Heart of Weak U.S. Economy-July 2011
  18. ^ Brookings Institution, Is a Household Debt Overhang Holding Back Consumption?, Spring 2012 Archived 2012-10-31 at the Wayback Machine
  19. ^ Time Magazine-Foroohar-Digging out of the Debt Hole-July 2012
  20. ^ Washington Post-Neil Irwin-Consumer Debt is Soaring-July 2013
  21. ^ NYT-Joe Nocera-November 2011
  22. ^ Justice for Some Project Syndicate-Joseph Stiglitz-Justice for Some-November 2010
  23. ^ NYT-Stiglitz and Zandi-The One Housing Solution Left-Mass Mortgage Refinancing-August 2012
  24. ^ NYT-Reinhart and Rogoff-Debt, Growth and the Austerity Debate-April 2013
  25. ^ Time For A New Mortgage Plan: Debt-For-Equity Swaps-July 2009
  26. ^ Hussman Funds Newsletter-John Hussman-April 2009
  27. ^ The Atlantic-Economic Growth Idea: Forgive or Restructure Debt U.S. Citizens Hold-Clemons-July 2012
  28. ^ The Atlantic-Clemons and Vague-How to Predict the Next Financial Crisis-July 2012
  29. ^ Federal Reserve Bank of St. Louis-The Federal Response to Home Mortgage Distress: Lessons from the Great Depression-June 2008
  30. ^ Project Syndicate-Kenneth Rogoff-The Second Great Contraction-August 2011
  31. ^ European Commission 2008 Towards a common operational European definition of over-indebtedness
  32. ^ Eurofound 2010 Managing household debts: Social service provision in the EU
  33. ^ Eurofound 2012 Household debt advisory services in the European Union
Amir Sufi

Amir Sufi is the Bruce Lindsay Professor of Economics and Public Policy at the University of Chicago Booth School of Business. He was awarded the 2017 Fischer Black Prize by the American Finance Association, given biennially to a financial economics scholar under the age of 40 for significant original research that is relevant to finance practice. He was awarded for his work on household debt and the financial crisis.

Consumer debt

In economics, consumer debt is the amount owed by consumers (as opposed to amounts owed by businesses or governments). It includes debts incurred on purchase of goods that are consumable and/or do not appreciate. In macroeconomic terms, it is debt which is used to fund consumption rather than investment. The most common forms of consumer debt are credit card debt, payday loans, and other consumer finance, which are often at higher interest rates than long-term secured loans, such as mortgages.

Long-term consumer debt is often considered fiscally suboptimal. While some consumer items such as automobiles may be marketed as having high levels of utility that justify incurring short-term debt, most consumer goods are not. For example, incurring high-interest consumer debt through buying a big-screen television "now", rather than saving for it, cannot usually be financially justified by the subjective benefits of having the television early. On the other hand, personal finance advisers like Robert Kiyosaki encourage a more liberal attitude towards taking on debt if it can be leveraged into a small business or real estate.

In many countries, the ease with which individuals can accumulate consumer debt beyond their means to repay has precipitated a growth industry in debt consolidation and credit counseling.

The amount of debt outstanding versus the consumer's disposable income is expressed as the consumer leverage ratio. On a monthly basis, this debt ratio is advised to be no more than 20 percent of an individuals take-home pay. The interest rate charged depends on a range of factors, including the economic climate, perceived ability of the customer to repay, competitive pressures from other lenders, and the inherent structure and security of the credit product. Rates generally range from 0.25 percent above base rate, to well into double figures. Consumer debt is also associated with predatory lending, although there is much debate as to what exactly constitutes predatory lending.

In recent years, an alternative analysis might view consumer debt as a way to increase domestic production, on the grounds that if credit is easily available, the increased demand for consumer goods should cause an increase of overall domestic production. The permanent income hypothesis suggests that consumers take debt to smooth consumption throughout their lives, borrowing to finance expenditures (particularly housing and schooling) earlier in their lives and paying down debt during higher-earning periods.

Personal debt is on the rise, particularly in the United States and the United Kingdom. However, according to the US Federal Reserve, the US household debt service ratio is at the lowest level since its peak in the Fall of 2007.

Consumer leverage ratio

The consumer leverage ratio, a concept popularized by William Jarvis and Dr. Ian C MacMillan in a series of articles in the Harvard Business Review, is the ratio of total household debt, as reported by the Federal Reserve System, to disposable personal income, as reported by the US Department of Commerce, Bureau of Economic Analysis. The ratio has been used in economic analysis and reporting and has been compared to other relevant economic variables since the 1970s.

Credit crunch

A credit crunch (also known as a credit squeeze or credit crisis) is a sudden reduction in the general availability of loans (or credit) or a sudden tightening of the conditions required to obtain a loan from banks. A credit crunch generally involves a reduction in the availability of credit independent of a rise in official interest rates. In such situations, the relationship between credit availability and interest rates changes. Credit becomes less available at any given official interest rate, or there ceases to be a clear relationship between interest rates and credit availability (i.e. credit rationing occurs). Many times, a credit crunch is accompanied by a flight to quality by lenders and investors, as they seek less risky investments (often at the expense of small to medium size enterprises).

Debt buyer (United States)

A debt buyer is a company, sometimes a collection agency, a private debt collection law firm, or a private investor that purchases delinquent or charged-off debts from a creditor or lender for a percentage of the face value of the debt based on the potential collectibility of the accounts. The debt buyer can then collect on its own, utilize the services of a third-party collection agency, repackage and resell portions of the purchased portfolio or any combination of these options.

The Federal Trade Commission (FTC) administers the 1997 landmark federal Fair Debt Collection Practices Act (FDCPA), which established debt collection industry standards and depends on the industry self-regulating or "self-enforcing" the statute through "private action" as opposed to "government law enforcement". FDCPA protect consumers and ethical collectors.From 1999 to 2009, the "advent and growth of debt buying", that is "the purchasing, collecting, and reselling of debts in default" was considered to be the "most significant change" in the "debt collection business". According to Sacramento, California-based Debt Buyers Association (DBA), a debt buyers trade association, by 2008 there were "hundreds, and possibly thousands" of debt buyers. The debt buying industry was highly concentrated according to The Nilson Report with only ten debt buyers "responsible for 81 percent of all of the credit card debt purchased in fiscal year 2007."DBA, which was established in 1997 and is now known as Receivables Management Association (RMA), provides the self-regulation tool for debt buyers, the International Receivables Management Certification Program which has been obligatory for all RMA members since February 29, 2016.In 2015, Encore Capital Group and subsidiaries form the largest debt buyer and collector in the United States and Portfolio Recovery Associates was the second largest.

According to the Federal Reserve Bank of New York's May 2017 Quarterly Report on Household Debt and Credit, Americans owe $12.73 trillion in consumer debt to creditors—credit card companies, student loans, mortgages, and car dealers, among others. These debts are usually paid off to creditors, but by 2017, unpaid debts were "increasingly likely to end up in the hands of professional debt collectors—companies whose business it is to collect debts that are owed to other companies." According to the annual CFPB 2017 report, there were 130,000 people employed by 6,000 collection agencies in the "$13.7 billion dollar industry".

Debt consolidation

Debt consolidation is a form of debt refinancing that entails taking out one loan to pay off many others. This commonly refers to a personal finance process of individuals addressing high consumer debt, but occasionally it can also refer to a country's fiscal approach to consolidate corporate debt or Government debt. The process can secure a lower overall interest rate to the entire debt load and provide the convenience of servicing only one loan or debt.

Debt management plan

A debt management plan (DMP) is an agreement between a debtor and a creditor that addresses the terms of an outstanding debt. This commonly refers to a personal finance process of individuals addressing high consumer debt. Debt management plans help reduce outstanding, unsecured debts over time to help the debtor regain control of finances. The process can secure a lower overall interest rate, longer repayment terms, or an overall reduction in the debt itself.

Disposable and discretionary income

See country lists in disposable household and per capita income.Disposable income is total personal income minus personal current taxes. In national accounts definitions, personal income minus personal current taxes equals disposable personal income. Subtracting personal outlays (which includes the major category of personal [or private] consumption expenditure) yields personal (or, private) savings, hence the income left after paying away all the taxes is referred to as disposable income.

Restated, consumption expenditure plus savings equals disposable income after accounting for transfers such as payments to children in school or elderly parents’ living and care arrangements.The marginal propensity to consume (MPC) is the fraction of a change in disposable income that is consumed. For example, if disposable income rises by $100, and $65 of that $100 is consumed, the MPC is 65%. Restated, the marginal propensity to save is 35%.

For the purposes of calculating the amount of income subject to garnishments, United States' federal law defines disposable income as an individual's compensation (including salary, overtime, bonuses, commission, and paid leave) after the deduction of health insurance premiums and any amounts required to be deducted by law. Amounts required to be deducted by law include federal, state, and local taxes, state unemployment and disability taxes, social security taxes, and other garnishments or levies, but does not include such deductions as voluntary retirement contributions and transportation deductions. Those deductions would be made only after calculating the amount of the garnishment or levy. The definition of disposable income varies for the purpose of state and local garnishments and levies.

According to the Better Life Index study conducted by the Organisation for Economic Co-operation and Development (OECD), the United States of America has the highest average household disposable income of all of the OECD member countries in the world.Discretionary income is disposable income (after-tax income), minus all payments that are necessary to meet current bills. It is total personal income after subtracting taxes and minimal survival expenses (such as food, medicine, rent or mortgage, utilities, insurance, transportation, property maintenance, child support, etc.) to maintain a certain standard of living. It is the amount of an individual's income available for spending after the essentials have been taken care of:

Discretionary income = gross income – taxes – all compelled payments (bills)Despite the definitions above, disposable income is often incorrectly used to denote discretionary income. For example, people commonly refer to disposable income as the amount of "play money" left to spend or save. The Consumer Leverage Ratio is the expression of the ratio of total household debt to disposable income.

Economy of Canada

The economy of Canada is a highly developed mixed economy with 10th largest GDP by nominal and 16th largest GDP by PPP in the world. As with other developed nations, the country's economy is dominated by the service industry, which employs about three quarters of Canadians. Canada has the fourth highest total estimated value of natural resources, valued at US$33.2 trillion in 2016. It has the world's third largest proven petroleum reserves and is the fourth largest exporter of petroleum. It is also the fourth largest exporter of natural gas. Canada is considered an "energy superpower" due to its abundant natural resources and small population.Canada is unusual among developed countries in the importance of the primary sector, with the logging and oil industries being two of Canada's most important. Canada also has a sizable manufacturing sector, based in Central Canada, with the automobile industry and aircraft industry being especially important. With the world's longest coastline, Canada has the 8th largest commercial fishing and seafood industry in the world. Canada is one of the global leaders of the entertainment software industry. It is a member of the APEC, NAFTA, G7, G20, OECD and WTO.

Financial position of the United States

The financial position of the United States includes assets of at least $269.6 trillion (1576% of GDP) and debts of $145.8 trillion (852% of GDP) to produce a net worth of at least $123.8 trillion (723% of GDP) as of Q1 2014.

The U.S. increased the ratio of public and private debt from 152% GDP in 1980 to peak at 296% GDP in 2008, before falling to 279% GDP by Q2 2011. The 2009-2011 decline was due to foreclosures and increased rates of household saving. There were significant declines in debt to GDP in each sector except the government, which ran large deficits to offset deleveraging or debt reduction in other sectors.As of 2009, there was $50.7 trillion of debt owed by US households, businesses, and governments, representing more than 3.5 times the annual gross domestic product of the United States. As of the first quarter of 2010, domestic financial assets totaled $131 trillion and domestic financial liabilities $106 trillion. Tangible assets in 2008 (such as real estate and equipment) for selected sectors totaled an additional $56.3 trillion.

Great Recession

The Great Recession (see "Terminology" for other names) was a period of general economic decline observed in world markets during the late 2000s and early 2010s. The scale and timing of the recession varied from country to country (see map). The International Monetary Fund (IMF) has concluded that it had the most severe economic and financial meltdown ever since the Great Depression and it is frequently seen as the second worst downturn of all time.The Great Recession stemmed from the collapse of the United States real-estate market in relation to the global financial crisis of 2007 to 2008 and the U.S. subprime mortgage crisis of 2007 to 2009, though policies of other nations contributed as well. According to the nonprofit National Bureau of Economic Research (the official arbiter of U.S. recessions), the recession in the U.S. began in December 2007 and ended in June 2009, thus extending over 19 months. The Great Recession resulted in a scarcity of valuable assets in the market economy and the collapse of the financial sector (banks) in the world economy; some banks were bailed out by the U.S. federal government.The recession was not felt equally around the world; whereas most of the world's developed economies, particularly in North America and Europe, fell into a definitive recession, many more recently developed economies suffered far less impact, particularly China and India, whose economies grew substantially during this period.

House of Debt

House of Debt: How They (and You) caused the Great Recession, and How We Can Prevent It from Happening Again is a 2014 book by economists Atif Mian and Amir Sufi on the linkages between household debt in the United States and the 2008 financial crisis.

List of countries by household debt

The following list sorts countries by household debt as percentage of GDP according to data by the International Monetary Fund. Household debt is defined as the combined debt of all people in a household. It includes mortgage loans and consumer debt like car loans, student loans and credit card debt.

Lists of countries by debt

The following articles contain lists of countries by debt:

List of countries by public debt

List of countries by household debt

List of countries by external debt

Middle-class squeeze

The middle-class squeeze is the situation where increases in wages fail to keep up with inflation for middle-income earners leading to a relative decline in real wages, while at the same time, the phenomenon fails to have a similar effect on the top wage earners. People belonging to the middle class find that inflation in consumer goods and the housing market prevent them from maintaining a middle-class lifestyle, undermining aspirations of upward mobility. In the United States, middle-class income is declining while many goods and services are increasing in price, such as education, housing, child care, and healthcare.

Monetary reform in the United States

Monetary reform, the reform of monetary creation and thus of the banking system, is a topical political issue in the United States, especially in light of the public debt (15 trillion dollar in November 2011), household debt (student debts, etc.), Social Security and other public sector undertakings and state debts. The financial crisis that began in U.S. in the fall of 2007 and subsequently affected large parts of the world, and was followed by massive bank rescues (so-called bailouts), also plays a major role in this context as well as criticism of Federal Reserve. Strictly speaking, there are two separate movements for monetary reform in the U.S., one is more left-wing and the other is more right-wing. In Congress these views are represented mainly by Dennis Kucinich, which belong to the progressive left, and Ron Paul, known right-wing "Fed critics." The debate often focuses on questions such as how the banking system works today, debts, bailouts, the Federal Reserve, and more. But history is also alive in the debate, for example is Abraham Lincoln's so-called Greenbacks something that often is mentioned. The main American organization for "monetary reform" is the American Monetary Institute.

Peak debt

Peak debt is a term meaning borrowing limit, in the same way peak water is a term meaning water limit.

Peak debt is the stage at which an economy or an individual's debt servicing costs become so high relative to income that spending must slow down or stop. The term 'peak debt' was coined by Jaswant Jain PhD in 2006. Jain concluded that debt will eventually reach a limit at which point consumption must be reduced to pay the debt and interest. This reduction in consumption will inevitably have a deflationary or disinflationary effect.

Seemingly, the first person to use peak debt in relation to house prices was Michael McNamara. He contends that, specifically house prices have risen dramatically through the increased borrowing power of purchasers. This was facilitated through rapidly expanding loan to valuation ratios adopted by lenders since the deregulation of financial markets in the early 1980s. Logically, the argument posed states that as growth in credit slows limited by incomes, so too shall the price growth in housing become more subdued.

Since then, growth in asset markets and median property values have been outstripping incomes in many countries, and some people believe the corresponding international, national and household debt levels are unsustainable. To many people, it seems impossible for prices to keep rising faster than incomes, because eventually so much would be spent on debt servicing costs that there would be no money remaining for anything else.

Some observers such as Professor Steve Keen of University of Western Sydney, believe that many countries are hurtling towards peak debt, fueled by excess borrowing and an addiction to credit. To such observers, it appears illogical to take on ever increasing debt just to bid against each other for the same assets. Nations must at some stage reach their maximum debt limit. The timeframe for reaching this limit is always unknown but some believe we are at that limit already, or very close, in many countries.

Ron Laszewski attempts to determine the peak debt limit for America in his 2008 Peak Debt paper. Since the Bureau of Economic Analysis has statistics on how much Americans earn, how much they save, and how much they spend on debt servicing, it was possible for Laszewski to estimate how close America might be to a peak debt limit.

The term 'peak debt' has similar origins to other 'peaks' such as peak oil, peak water, peak food, peak minerals, and peak population.

Subprime mortgage crisis

The United States subprime mortgage crisis was a nationwide financial crisis, occurring between 2007 and 2010, that contributed to the U.S. recession of December 2007 – June 2009. It was triggered by a large decline in home prices after the collapse of a housing bubble, leading to mortgage delinquencies and foreclosures and the devaluation of housing-related securities. Declines in residential investment preceded the recession and were followed by reductions in household spending and then business investment. Spending reductions were more significant in areas with a combination of high household debt and larger housing price declines.The housing bubble preceding the crisis was financed with mortgage-backed securities (MBSes) and collateralized debt obligations (CDOs), which initially offered higher interest rates (i.e. better returns) than government securities, along with attractive risk ratings from rating agencies. While elements of the crisis first became more visible during 2007, several major financial institutions collapsed in September 2008, with significant disruption in the flow of credit to businesses and consumers and the onset of a severe global recession.There were many causes of the crisis, with commentators assigning different levels of blame to financial institutions, regulators, credit agencies, government housing policies, and consumers, among others. Two proximate causes were the rise in subprime lending and the increase in housing speculation. The percentage of lower-quality subprime mortgages originated during a given year rose from the historical 8% or lower range to approximately 20% from 2004 to 2006, with much higher ratios in some parts of the U.S. A high percentage of these subprime mortgages, over 90% in 2006 for example, were adjustable-rate mortgages. Housing speculation also increased, with the share of mortgage originations to investors (i.e. those owning homes other than primary residences) rising significantly from around 20% in 2000 to around 35% in 2006–2007. Investors, even those with prime credit ratings, were much more likely to default than non-investors when prices fell. These changes were part of a broader trend of lowered lending standards and higher-risk mortgage products, which contributed to U.S. households becoming increasingly indebted. The ratio of household debt to disposable personal income rose from 77% in 1990 to 127% by the end of 2007.When U.S. home prices declined steeply after peaking in mid-2006, it became more difficult for borrowers to refinance their loans. As adjustable-rate mortgages began to reset at higher interest rates (causing higher monthly payments), mortgage delinquencies soared. Securities backed with mortgages, including subprime mortgages, widely held by financial firms globally, lost most of their value. Global investors also drastically reduced purchases of mortgage-backed debt and other securities as part of a decline in the capacity and willingness of the private financial system to support lending. Concerns about the soundness of U.S. credit and financial markets led to tightening credit around the world and slowing economic growth in the U.S. and Europe.

The crisis had severe, long-lasting consequences for the U.S. and European economies. The U.S. entered a deep recession, with nearly 9 million jobs lost during 2008 and 2009, roughly 6% of the workforce. The number of jobs did not return to the December 2007 pre-crisis peak until May 2014. U.S. household net worth declined by nearly $13 trillion (20%) from its Q2 2007 pre-crisis peak, recovering by Q4 2012. U.S. housing prices fell nearly 30% on average and the U.S. stock market fell approximately 50% by early 2009, with stocks regaining their December 2007 level during September 2012. One estimate of lost output and income from the crisis comes to "at least 40% of 2007 gross domestic product". Europe also continued to struggle with its own economic crisis, with elevated unemployment and severe banking impairments estimated at €940 billion between 2008 and 2012. As of January 2018, U.S. bailout funds had been fully recovered by the government, when interest on loans is taken into consideration. A total of $626B was invested, loaned, or granted due to various bailout measures, while $390B had been returned to the Treasury. The Treasury had earned another $323B in interest on bailout loans, resulting in an $87B profit.

United States (TV series)

United States is an American sitcom (dramedy) that aired on NBC from March 11 until April 29, 1980.

Larry Gelbart, the show's executive producer and chief writer, said the name United States was not a reference to the country but rather to "the state of being united in a relationship". Gelbart envisioned a series that would be "a situation comedy based on the real things that happen in my marriage and in the marriages of my friends".

Episodes tackled such topics as marital infidelity, household debt, friends who drink too much, death within the family, and sexual misunderstandings.

United States focused on Richard and Libby Chapin, an upwardly mobile couple who lived in a Los Angeles suburb, Woodland Hills. Beau Bridges played Richard, and Helen Shaver played Libby. Gelbart reverted to black-and-white script for the show's titles. He said that was to convey the mood of "a sophisticated '30s film." Gelbart also avoided use of background music and a laugh track. Scripts featured dialogue such as, "Just for once I'd like to be treated like a friend instead of a husband," and "Maybe you and Bob can go out and get yourselves one redhead with two straws."

United States premiered at 10:30 p.m. on March 11, 1980. NBC pulled it from the schedule within two months, after only seven of 13 episodes had aired. The series aired later that year in Britain on BBC2, under the title Married. The remaining episodes were not broadcast in the US until 1986, when the A&E cable channel aired United States.

The show's tagline made by NBC was "It will do to marriages what M*A*S*H did for war".

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