Sweet Orange

Previously, I wrote that  Americans 65 to 74 had been increasingly taking on a large amount of housing debt. Another indication of our unhealthy reliance on debt is the numbers from the Federal Reserve that compare our disposable income to our personal debt. It’s not a pretty story.

Keep in mind these numbers are for our individual debt, not the national debt. (The national debt is a story for another time.)

1975:

• Personal Consumer Debt–736.3 billion
• Consumer Disposable Income*–1187.4 billion
• Personal Debt as Percent of Disposable Income–62.0%

1990:

• Consumer Debt–3592.9 billion
• Consumer Disposable Income*–4285.8 billion
• Personal Debt as Percent of Disposable Income–83.8 %

2000:

• Consumer Debt–6960.0 billion
• Consumer Disposable Income*–7194.0 billion
• Personal Debt as Percent of Disposable Income–96.8 %

2005:

• Consumer Debt–11496.6 billion
• Consumer Disposable Income*–9039.5 billion
• Personal Debt as Percent of Disposable Income–127.2%

*Disposable income is the income after paying taxes.

As I look at these numbers–over 100% of disposable income is consumed in debt–I can’t help but wonder why organizations like the Federal Reserve weren’t sounding the alarm: DANGER-Cliff with steep drop ahead. Surely, these organizations that deal with financial matters every day should have seen this coming.

And what about the media? Especially the financial media. Why wasn’t this information plastered over every newspaper’s front page? And then there is the rest of us? Were we sleeping? Was this information available to us, and we just didn’t see what we didn’t want to see?

In hindsight, it is easy to see that 100+ percent debt to income ratio is not sustainable. But the numbers are so blatant that it should have been obvious in foresight.

Sources: Monthly Review/Board of Governors of the Federal Reserve System, Flows of Funds Accounts of the United States, Historical Series and Annual Flows and Outstandings, Fourth Quarter 2005 (March 9, 2006). Available at http://www.federalreserve.gov/releases/Z1/Current/.

GRAPH: SEEKING ALPHA

Update: To see the 2007 personal debt to income ratio as well as the current ratio, see “Personal Debt to Income Ratio Rose to Over 100%–Revisited.”