November 2, 2007 3:30

Have we reached the consumer debt limit?

Wondering why the banking sector's problems keep failing to go away? Take a look at this chart:

Since the early 1980s, we Americans have been piling on debt. Much of that surely has been to the good, enabling us to enjoy our houses and cars and fridges while paying for them rather than waiting until we've saved up all the money. The big rise in indebtedness at the beginning of the chart above (in the 1950s and early 1960s) certainly worked out okay for everybody.

But while I have no idea what the optimal ratio of debt to income is, there's something about the steepness of the rise since 2000 that makes me think that maybe we as a nation recently steamed right past it. As crotchety bank analyst Richard Bove told me a couple of weeks ago, "We’ve reached a point where there’s not enough income in economy to pay for all the debt."

That's actually not quite true: When you look at the ratio of debt service payments to income calculated by the Fed, it looks as if America as a whole still ought to be able to make those payments (alert: this chart is on a shorter time scale than the first one):

But America as a whole doesn't make debt payments; individual Americans do. The issue, especially over the past few years, is that the people with the big incomes aren't necessarily the ones with the big debts. So we may be standing near the beginning of an extended period of retrenchment, in which some people pay down their debts and others default on them. (I should emphasize that I'm saying may; lots of people have been predicting this for years and been wrong). And both those things are bad for bank profits.