Three Reasons Why Consumer Debt Falling Is Bad News

I know what you're thinking right now. Considering the sheer number of financial gurus and guru-wannabes who've been screaming GET OUT OF DEBT RIGHT NOW BEFORE IT'S TOO LATE IT WILL KILL YOUR CHILDREN, how could it ever possibly be a bad thing that consumer debt is actually falling for the first time in sixty years, as I noticed whilst reading the Financial Times?

Yes, Suze Orman is probably already planning to run me over with her affordably-priced family sedan as we speak. But there are actually three reasons why this is really, really horrible news. I present them for you now.

1. De-leveraging reduces total credit in-system and therefore credit amounts. One part of how credit-worthiness is determined is based on how much credit you've had and how well you manage it, in the form of paying it off. If you've already shown that you can handle a limit of ten grand reliably, no one's really concerned about edging it up to, say, fifteen or twenty, even twenty five. But the less you use credit, the less anyone wants to give you. If your limit is five grand and you never spend more than one, don't be surprised to find your limit slashed.

2. A big chunk of that reduction isn't payoff, but write off. It's not so much that people got super responsible, tightened their belts, and set to work paying off their credit card debts, but rather that the credit card companies realized you can't get blood from the stone that is ten percent unemployment (and it's WAY more if you count all the indices--some project it's more like twenty five percent when you factor in under-employed and discouraged workers) and are thus writing off the debts.

3. A consumer economy depends on consumer purchases. It's not exactly a surprise, but for a consumer economy to get anywhere, consumers (that's us) have to, you know, buy stuff. And with household debt falling, and harder to get besides, that means consumers will buy much, much less stuff. If people buy less stuff, less stuff needs to be made. Thus, fewer people need to be employed making stuff, which in turn leads to fewer people buying stuff, and...you see where this is going. Maybe we'll make it up. Maybe we'll get into exports. But this is a long shot to say the least and shouldn't be counted on.

So as good as it may sound that consumers are de-leveraging, it's actually, secretly, horrible news.