A recent article from Fortune Magazine online (Matthews, 18 Feb 2014) describes the increasing household debt of Americans. The economy is recovering, and with it is the recovering appetite for consumer debt. Of course, we haven’t seen the same levels of debt we saw in 2008, but still borrowing is in the rise.
The article describes debt as good, bad, or ugly.
First, good debt. From the article:
It takes years for individuals and businesses to repair their finances following a financial crisis, so this dynamic can continue for many years, with the economy growing steadily worse all the while. That's why the recent increase in consumer debt is a good thing. It means that individuals have finally repaired their personal finances (at least in the aggregate) and feel like they can start borrowing again. In this situation, the economy can really begin to grow again.
But not all debt is good. There’s bad debt and then there’s debt that’s downright ugly. This is the debt associated with low and middle income Americans whose credit quality and income levels have not improved sufficiently. In particular, those with low credit quality are taking on more student loan debt, and it is not clear whether they are getting jobs that allow them to repay those loans.
Graph available at http://libertystreeteconomics.newyorkfed.org/2014/02/just-released-whos-borrowing-now-the-young-and-the-riskless.html
Why is debt necessary for a healthy economy? How might debt signal that an economy is headed for financial distress?
According to this blog from the NY Fed, how does recent consumer credit compare with the picture before the credit crisis?