Consumerism & Debt

For the most part, American media gives its attention to public debt --- that is, the debt owed by the federal and state governments. What is discussed less, though is possibly more important, is the huge amount of consumer debt and its effect on the economy. The Federal Reserve reports that, as of December of 2010, American consumer debt --- not including mortgages --- was at $2.4 trillion.

Basics

The American economy is based on debt. The current level of production cannot be absorbed solely by cash. Credit cards and other lines of credit developed as a means of giving Americans more buying power without relying solely on cash in hand. This has also increased consumption and, as a result, debt. Of the present American debt, roughly 33 percent is credit card debt, while the remainder is centered around student loans, car loans, small business loans and other forms of credit.

Issues

According to the Federal Reserve, as of late 2010, the average mortgage holder in America has a debt-to-income ratio of about 12 percent. This means that the debt of the average homeowner is about 12 percent more than their total net worth. If you are a renter, the average is about 24 percent more than your total net worth. The main problem, according to economics writers Martin Bailey and Susan Lund, is that since wages have been stagnant since at least 2000, increased consumer spending in the midst of such extreme levels of debt is unlikely.

Contradictions

There is a consumer debt contradiction built into the very structure of the modern economy. The health of the economy is based largely on the willingness of Americans to spend way beyond their means. Yet, this spending cannot go on forever. If wages remain stagnant, then recession and depression are automatically built in as a result, since the economy is based on the buying of commodities. In other words, the debt must decrease for spending to continue; but if debt is decreased, then the economy cannot grow.

Implications

Given the nature of the "debt trap" contradiction, the modern economy will be forced to reorganize itself. This would mean that consumption is stressed less due to the fact that the individual consumer has reached his limit. Households, in order to work through their own debt crises, are being forced to rethink their needs and requirements, to save more and consume less. This concept is called "de-commodification" and refers to an economy that must simplify its needs and wants in order to remove itself from the "boom and bust" cycle revolving around consumer debt, and the resulting problem of overproduction.