Commentary
High expectations and disastrous monetary policy have put Americans into a vicious debt spiral.
In the first quarter of 2023, American household debt hit a record high of $17.05 trillion, about 73 percent of the nation’s GDP. One of the many issues with the high debt rates that Americans carry is that with rising interest rates, this heavy debt burden will become more difficult to bear. Americans have become used to borrowing, but that borrowing will now be more costly.
To make matters worse, 62 percent of people live paycheck to paycheck. To survive, they remain in a perpetual cycle of borrowing because they cannot afford the cost of living while also servicing their existing debt. In order to survive the recent years of inflation and rising debt, about 44 percent of Americans have begun working a side job of some type. Most people, once they are working two jobs, will be out of options if they find they still cannot afford to live.
Part of the blame for the debt spiral is that Americans have become accustomed to goods and services regarded as luxuries just 20 years ago but are now considered necessities. The average American spends $84 a month on phone service, which may or may not include purchasing a phone. Roughly 86 percent of Americans pay for two or more streaming services for a total of $39 a month, and about half say they pay for a service they do not use. Companies, in general, are switching to subscription models, charging a monthly fee for everything from social media and news to retail and status membership cards. Subscriptions are so common nowadays that the average person spends $219 monthly in recurring charges.
InstaCart employees fulfill orders for delivery at the new Whole Foods Market Inc. store in downtown Los Angeles, Calif., on Nov. 9, 2015. Patrick T. Fallon/Bloomberg Photo via Getty Images
A lot of Americans order delivered meals rather than cook at home. The average cost of meal delivery is $33.89, and most Americans order about 60 meals a year. Fancy takeout coffee is considered the norm now, and most people spend about $40 a month at coffee shops. Rather than driving across the country to see the Grand Canyon, experiential travel and luxury vacations are on the rise. Where previous generations flew a few times in a lifetime, the average American flies 3.6 times per year. And where people used to get their haircut at a barber or hairdresser, work out at the YMCA, and then take a shower with Ivory soap, now most Americans go to a salon or spa and spend an average of $110 a month on premium personal care and wellness services.
Another reason why Americans are drowning in debt is that prices have risen. Since 2021, cumulative inflation has caused prices of most goods to increase by 13 percent, while prices of many goods and services have increased by as much as 20 percent. Inflation is a monetary phenomenon that correlates directly to the increase in money supply.
When the Federal Reserve (Fed) feels the economy is slowing, it will increase the money supply. Initially, as new money enters the economy, people can spend more. But very quickly, this increased quantity of money decreases the value of money, and although people have more dollars in their pockets, those dollars can buy fewer goods and services. After the 2008 financial crisis, the Fed kept interest rates and bank reserve requirements low to encourage borrowing while creating new money. This artificial money creation continued until last year.
When the Fed creates money, it does not actually print more notes. Instead, it creates bank reserves electronically by purchasing Treasury bonds or mortgage-backed securities from banks. In return, the Fed credits the banks’ reserve accounts with the corresponding amount of money that banks can then lend out. Since 2008, the Fed has inflated the money supply by $13.73 trillion, an increase of 180 percent. This has added to both inflation and household debt. Meanwhile, households are not the only ones in debt. The government is also heavily indebted.
After the 2008 financial crisis, as well as during COVID-19 lockdowns, in addition to monetary policy, the government implemented expansionary fiscal policy, including stimulus and bailouts. This increased government spending added to government debt, which is already 120 percent of GDP. The national debt, composed of government plus private debt, now stands at $32.5 trillion.
The Biden administration wants to help households cope with inflation by forgiving student loans. Student loans account for about $1.60 trillion of household debt. If the government absorbs these debts, it does not make them disappear. It merely shifts the balance from household debt to government debt.
Views expressed in this article are opinions of the author and do not necessarily reflect the views of The Epoch Times.
