Consumer Debt Charts Biggest Gain in 20 Years

The Federal Reserve is talking about raising interest rates. Well, that’s going to be a big problem for American consumers who are running up debt at a torrid pace. This is yet another reason why the Fed can’t do what it’s claiming it will do.

Consumer debt jumped 11% year-on-year in November, according to the latest data released by the Federal Reserve. It was the biggest single-month jump in consumer debt in 20 years.

Total consumer debt jumped by $39.9 billion in November. That doubled the $20 billion gain economists polled by the Wall Street Journal expected. Total consumer debt now stands at over $4.41 trillion.

The Federal Reserve consumer debt figures include credit card debt, student loans and auto loans, but do not factor in mortgage debt. When you include mortgages, Americans are buried under nearly $15 trillion in debt.

Revolving debt – primarily credit card balances – grew by a staggaring 23.4% year-on-year in November. That was the biggest increase since 1998. Americans took on another $19.8 billion in credit card debt, pushing the total to just under $1.04 trillion.

Non-revolving credit, including auto loans and student loans, rose by 20.1 billion in November, bringing total non-revolving debt to just under $3.38 trillion. Year-on-year, non-revolving debt grew by 7.2%.

Mainstream reporting tends to spin increasing consumer debt as good news. According to the narrative, Americans believe that the economy is strong and they feel confident enough to borrow money. MarketWatch reported, “The jump may reflect households using credit more freely. During the pandemic, many households curtailed their credit card debt or used stimulus funds to pay down balances.” MarketWatch quoted another economist who blamed the big leap in debt on people buying more stuff online. He optimistically predicted, “we could see consumers pay down balances in the first quarter.”

But November wasn’t the first month with a big jump in consumer debt.

MarketWatch is correct in saying that during the pandemic, Americans, by and large, kept their credit cards in their wallets and paid down balances. This is typical consumer behavior during an economic downturn. Credit card balances were over $1 trillion when the pandemic began. They fell below that level in 2020. We saw small upticks in credit card balances in February and March of this year as the recovery began, with a sharp drop in April as another round of stimulus checks rolled out. But Americans started borrowing in earnest again in May. Since then, we’ve seen a steady increase in consumer debt.

Meanwhile, rising prices have squeezed American wallets. Real incomes are falling.

Yes, increasing levels of debt could signal consumer optimism. But it could just as easily signal Americans are struggling to make ends meet and they’re turning to credit cards to pay their bills.

In other words, higher prices and an absence of stimulus checks are forcing Americans to borrow more to buy stuff they can’t afford.

The Federal Reserve and the US government have built a post-pandemic “economic recovery” on stimulus and debt. It is predicated on consumers spending stimulus money borrowed and handed out by the federal government or running up their own credit cards.

Now, the Fed is threatening to turn off that easy money spigot. How is that going to work? How will consumers buried under more than $1 trillion in credit card debt pay those balances down with interest rates rising? With rising rates, minimum payments will rise. It will cost more just to pay the interest on the outstanding balances.

This does not bode well for an economy that depends on consumers spending money on stuff imported from other countries.

The only reason Americans can borrow money is because the Fed is enabling them. It’s holding interest rates artificially low so that people can pay the interest on all this money that they’re borrowing. And that is what is helping to create a lot of these service sector jobs that would not exist but for the ability of Americans to go deeper into debt.

So, the impact of rate hikes will ripple through the entire economy. This is one of the reasons it’s unlikely the Fed will be able to follow through with monetary tightening. It will topple the pillars that support the economy.