July 02, 2018
It is common practice for people who completely missed the housing bubble to warn about another impending debt crisis which will sink the economy when it bursts. In this vein, we have a New York Times editorial telling us about the dangerous increase in credit card debt.
The piece tells readers:
“And now rates are now rising at time when household debt reached a record $13.21 trillion in the first quarter. Household debt service payments as a percentage of disposable income hit 5.9 percent in the first quarter, according to the Federal Reserve, a figure not reached since just before the Great Recession. Average credit card debt per borrower is about $5,700 and growing at a rate of 4.7 percent while wages are growing at about 3 percent. That can’t continue forever.”
Since they had the Fed’s data on debt burdens in front of them, they should have known the full picture, which is below.
Are you scared?
The piece also includes several other silly comparisons, starting with the comparison of the growth in average household debt to the growth in the average hourly wage. The czar of apples-to-apples insists they use average household income, which in nominal terms is growing at roughly the same rate. The editorial also repeatedly compares wealth to the 2007 bubble peaks. Surprise! We haven’t recovered.
The basis of the piece is the bad news that when the Fed raises interest rates it will mean higher interest payments on credit card debt. I am happy to have the NYT as an ally in the battle against unnecessary interest rate hikes, but the burden on credit card debt hardly tops the charts as a reason. Suppose interest rates rise 2.0 percentage points (a huge increase) on $1 trillion in credit card debt. That comes to $20 billion a year or about $150 a year per household. That’s not altogether trivial, but not a concern that keeps me awake at night.
It would be a much greater concern if Fed rate hikes kept 2–3 million people from working and lowered the wages on 30 or 40 million low- and moderate-wage workers by reducing their bargaining power. There is some value in keeping your eye on the ball and actually knowing something about the topics on which you write.
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