I find this kind of doomsday article about consumer debt incredibly misleading. The key issue with debt is not the amount of debt that a household has in actual dollar figures. That will rise over time due to inflation. It's not even the amount of debt that a household has in relation to hard assets. The key issue in determining whether a household has too much debt is ability to repay the debt, which is a combination of Net Asset Value (assets - liabilities) and Net Disposable Income. Basically, if a household's asset values and/or its disposable income levels are increasing, higher debt dollar figures are fine, as long as they are not increasing at a faster rate and over a historically relevant time period. According to this U.S. Census Report, 2001 median household income was about $42,000 (page 1). This is adequate to handle an $18,000 floating debt balance and indeed even sustain it, especially when you consider that for large ticket items (like cars) you have some salvage value to fall back on. Auto financing is typically at reasonable rates (not cheap, but inline with corporate debt) and is a convenient mechanism to smooth out household budgeting issues.

The only reason that an $18,000 consumer debt figure would scare me is if that figure is a total asset value of the household (all assets - all liabilities) and that figure was rising faster than disposable income of the household. This would factor in things like salvage value of assets purchased, retirement and investment accounts, savings accounts, etc. And nowhere in the article does it say that this is the case. Indeed, I can't even find any info on the Federal Reserve site to say that is the case. If it is, you can retract pretty much everything said to this point.

Now having said all this, I do think its necessary to point out that the big issue with asset value is liquidity. You have to have a market in which to sell. If everyone is trying to stampede for the door at the same time you find yourself in a dangerous position. My house may have a $100,000 value today, but if tomorrow everyone on my street decides to sell than that price might be meaningless (indeed, if everyone in my city is trying to sell it may be almost worthless). When assessing value it is important to remember that. The prudent person structures their fiscal matters in such a way that they choose to sell when the market is in their favor and don't allow themselves to be forced into a decision. The problem with debt is not the issue of being able to repay outright, but rather that you may be forced to repay when it is least in your economic interest.

2:41:10 PM  #  

House Backs Temporary Shift on Pension Funds. The House voted on Wednesday to allow businesses to pay less into workers' pension plans over the next two years.

Seems like a plan to me.

U.S. CEO: "Looks like our projections are a little off."

Congress: "By how much?"

U.S. CEO: "Well, we figured we would have a 10% return annually...which turns out to be a mistake. Stocks return 10% on average historically, but silly us put alot of it into bonds since they were more secure. We should have figured on 6% returns, but things looked so good a few years ago. I mean how could we lose with Yahoo!, Lucent, and MCI-WorldCom? Enron seemed like a sure thing too. Most of our workers were going to retire early anyway since they were making so much money day trading, we figured we would have money to spare."

Congress: "How MUCH?"

U.S. CEO: "About $350 billion. That's if people live about the same amount of time as they do today and medical costs don't spike as much as they have been. It's really not that much if you think about it. We just need to find some other companies to invest in. Who's poised to become the next Microsoft, or Wal-Mart? We only need 3 and a half Procter & Gambles to make up the shortfall!"

Congress: "You're making my head hurt."

U.S. CEO: "Oh, sorry, listen why don't you take a nap and I'll get to work on the problem...I'll let you know if anything promising pops into my head."

Congress: "Thanks. Why don't you try me again when I'm feeling better."

U.S. CEO: "How about 2 years from now?"

Congress: "That would be great. Thanks."

U.S. CEO: "No problem...by the way here's a little campaign money. I really appreciate all the work you've done for us."

Congress: "Your welcome. Just don't tell the workers about this. They vote too you know."

via [New York Times: Business]
2:00:16 PM  #