Debt and Debt Maintenance: Why American Households
Are Not in Big Trouble
by Gary North: The
Dollar As the World's Reserve Currency. Poor World.
There is no
more fundamental law of economics than this one: When the price
of something falls, more of it is demanded.
is illustrated by a demand curve. The demand curve slopes downward
and to the right. The higher the price, the less is demanded. The
lower the price, the more is demanded.
Are you with
me so far? Good. Let's continue.
The price of
obtaining a loan is set by the rate of interest. The higher the
rate of interest for any period of time, the higher the price of
the loan. As the rate of interest falls, more debt is demanded,
other things remaining equal.
The rate of
interest has fallen dramatically over the last 22 years. This is
especially true of mortgage loans. You can check this here.
Here is the trend for 30-year fixed-rate loans.
monthly mortgage payment is by far the main component of household
debt. So, when the price of leasing the money fell, more Americans
borrowed the money and used it to buy nicer housing. This was a
rational decision. "More house for the same monthly payment
-- what a deal!"
it ceased to be a deal, housing prices fell. Again, people have
been acting rationally. When things get tight, pay off old debt
and stop adding more. Or substitute new debt at a lower rate. Cut
your monthly payment. This is what Americans did.
not irrational. They can add up a column of figures. They do make
monthly budgets. They do estimate how much money they require to
get through one month. Then they make sure they don't run out of
money during the month.
To think that
people do not do this is to imagine that they are fools. They are
not fools. They are rational calculating decision-makers. They do
not do self-destructive things unless they are addicted.
They are not
addicted to debt. They are rational users of debt. They achieve
their goals by using debt.
Federal Reserve provides data going back to 1980 on what households
pay out each month for the money they have borrowed. The data indicate
rational behavior. People do not keep borrowing when they exceed
a specific percentage of debt repayment in relation to disposable
income. For home owners, the top rate is about 19%. In contrast,
when this rate reaches 15%, they increase their debt burden. In
the third quarter of 2007, the rate peaked.
the National Bureau of Economic Research, the recession began in
December: the last month of the fourth quarter.
adjusts to the economy. The public seemed to know what the non-Austrian
economists did not know in the fourth quarter of 2007: a recession
was imminent. It was time to cut back on debt in order to reduce
the monthly debt repayment burden. The public took defensive
action before corporations did.
the rest of the article
North [send him mail]
is the author of Mises
on Money. Visit http://www.garynorth.com.
He is also the author of a free 20-volume series, An
Economic Commentary on the Bible.
2011 Gary North
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