Credit and debt are two distinct things, yet they are related. For example, if you are a personal credit card holder, you are offered a “line of credit” that you may or may not use. If your “line of credit” is $10,000, that means you can borrow up to that point, but might not utilize any of that credit. If you borrow say, $4,300 by purchasing goods with your credit cards, your credit card “debt” is $4,300, but your credit is $10,000. You might be offered an increase in your credit line by your bank, and you might use this opportunity to increase your debt (or you might not). You might also have a bank close your account on you, or you could elect to close the account yourself. Businesses also have access to “lines of credit” from banks, and they might utilize them when they need to borrow money. Unfortunately, right when one firm decides they need money, many others might do the same thing, leading banks to cut lines of credit.
Here we explore how aggregate household debt has been changing over the last few years. Early in the year aggregate household debt was rising rapidly to $11.8 trillion, but it was still below the levels that it hit at the previous peak of $12.7 in 2008. Household debt–includes mortgages, credit cards, auto loans and student loans–has a cyclical feature (click on 1st graph to see). Non-housing debt is now at $3.24 trillion, as student loan ($1.2 T) and auto loan debt ($1 T) is on the rise (click on 2nd graph to see). Rising debt is usually associated with rising delinquencies, as increased debt burdens lead to more people being unable to pay their bills on time. It is notable that we are seeing rising delinquencies in student loans (11%) and falling (or flat) delinquencies in car loans and mortgages (click on 3rd graph to see). A recent note issued by the NY Federal Reserve explains these trends in some detail: Auto Loans Race Ahead, Foreclosures Plunge, and Overall Household Debt Remains Flat. The full Fed report provides a lot more detail on this issue, and it is a lot of charts so it is not that difficult to read.
In spite of the rising issuance of auto loans, the interest rate on these loans is near its all-time low. Student loans are on the rise, but these interest rates are often fixed by the government, and are also at very low levels. So, in some ways, banks are looking for places to lend money, and they might be willing to do it at low interest rates because they do not have great alternatives. Since home purchases have remained relatively stagnant, what does this say about our economy and the business cycle?
Questions You Might Address
- Why are student loans rising so rapidly, along with delinquencies? Many stories have been written about how young college graduates are not starting families because they have college loan debt that prevents them from buying houses and cars. Maybe you are not aware, but college loan debt is the most difficult of all debts to discharge, mostly because of its completely unsecured nature, and highly subsidized rates. College graduate unemployment rates are high, and many find it difficult to navigate the job market after graduation. We like to put a lot of emphasis on the numerous media reports about rising tuition, but the “net price” of tuition has actually not risen that much. So, why has student loan debt risen so much? What does it mean to be delinquent on these loans, and most importantly, what does this have to do with the business cycle?
- Credit cards, HELOC (home equity lines of credit), and personal credit lines are all ways of issuing credit to consumers, in ways that they will “hopefully” increase their debt and pay interest to the lenders. What has been happening in these markets, and what does this have to do with cycles or monetary policy? We can see in the Fed’s report (starting on page 4) that credit access peaked in the time around the height of the recession, and access to credit also subsequently dried up as banks shut down these lines of credit. You can look here, or for information on firm lines of credit to help explain what might be going on here.
- You could alternatively address these questions in the mortgage market. If you do, take a close look at the mortgage market for recent college graduates and millenials. Is it true that younger generations simply cannot afford to buy homes, or is something else going on? What does this have to do with central bank policy and business cycles? Or is this a long-run trend?