Consumers ended 2021 with record levels of debt and debt accumulation as the U.S. economy deals with rapid inflation.
Total U.S. consumer debt tallied $15.6 trillion, or a roughly $1 trillion jump year-over-year. Consumers also added about $333 billion of that annual debt in the fourth quarter, alone.
According to the Federal Reserve, the numbers represent the largest quarterly rise since 2007 (or right before the economy crashed) and the largest annual rise in the 19-year history of the report.
The rise in debt comes on the heels of an almost-certain changing monetary policy by the country’s central bank. Specifically, experts expect the Fed to raise interest rates, which will cut down on cheap loans and encourage more saving. The Fed has indicated that it will raise rates by 1.25 percent over the course of five quarter-point bumps.
The most significant sector of debt that rose in 2021 was mortgages — another leading indicator of an economic crash from 2007. Mortgages now account for nearly $11 trillion of the national consumer debt after a $890 billion bump last year. Mortgage originations also reached record highs, totaling more than $4.5 trillion total.
Whenever the real estate industry experiences unnatural booms, busts typically follow. Why? Because real estate becomes a safe haven asset for cash when inflation ticks higher but interest rates provide no yield. In those economies, money is cheap so banks want to lend as much as possible to net the highest return. And for the average consumer, where better to invest personal money than a house? Other options may not even exist for a typical consumer, frankly.
Times stay good for everyone as long as confidence remains high in the monetary institutions. If a panic-sell occurs in the market, or if banks begin recalling loans, then the house of cards comes tumbling down quickly and violently.
What does debt mean for consumers and the economic outlook?
Credit cards, auto loans, and student loans comprise the majority of the remaining consumer debt.
Though the market needs the rise in interest rates to combat inflation, it will certainly dissuade some consumers from going into even more debt at a more expensive price. The opposite of a successful economy is not an unsuccessful one, but rather a fearful one. If consumers feel strained to even make their current notes and interest (and given the rapid rise in debt, this is all-but guaranteed), then fear starts to creep in, buying dries up, and prices plummet.
Savvy investors can make money in any economy, though, so don’t let doom and gloom economists paint a nasty picture. Study the data, make informed decisions, and most importantly, never take on unneeded debt. Going into debt is not explicitly a bad thing, but going into debt that you cannot afford or that won’t provide revenue to you is a bad thing.