Amid high inflation, U.S. households are grappling with an unprecedented level of debt. We are witnessing record-high levels of debt since the 2008 crisis. A development that is causing growing concern in our nation.
2022 was a challenging year for every American. The onset of COVID-19 and the war in Ukraine brought major changes to the world economy. The average household struggled to make ends meet. Resulting in a significant spike in consumer loans, and a decrease in personal savings rate.
Evidence of this comes from the Federal Reserve’s report for the fourth quarter of 2022. The Quarterly Report on Household Debt and Credit was a sign of what was to come in 2023. Total household debt rose by $394 billion in the fourth quarter. Reaching a record-high household debt of $16.90 trillion. [Source]
Credit card, mortgage, auto, and student loans were the largest contributors. Credit card balances spiked to $986 billion. Which is an increase of $61 billion. Marking a new high since the pre-pandemic record of $927 billion. Mortgage loans jumped to $11.92 trillion, auto loans to $1.55 trillion, and student loans to $1.60 trillions.
At the same time, the economy is facing challenges with mounting inflation and banking sector instability. The Consumer Price Index reached 6.3% in April 2023, down slightly from 6.5% in December 2022. This slight moderation shouldn’t be seen as a sign of relief as it’s still far from the Federal Reserve’s 2% target. [Source]
Adding to the economic stress, recent bank failures have unsettled the financial sector. The collapse of Silicon Valley Bank, the second-biggest bank failure in U.S. history is raising alarms about the stability of the banking system. [Source]
In response to these challenges, the Federal Reserve raised its key interest rate. These actions are part of the Fed’s attempt to manage high inflation and diffuse banking sector instability. Was this effective, however? [Source]
The increased key interest rate contributed even more to the rise in household debt. Putting pressure on households and leading to an erosion of purchasing power. Which escalates the potential economic fallout even further.
This brings us to our main paint. Policymakers and financial institutions will need to balance the fight against inflation. Is the fight going in the right direction?
President Biden’s State of the Union Address on the 7th of February was a cause for concern. He said “inflation is coming down”. While it’s true that in April, 2023 the inflation rate decreased to 4.93%, an improvement from last year’s 8.26%, it’s still higher than the long term average of 3.28%. There is still a long way to go before it reaches the Federal Reserve’s target of 2%. [Source]
President Joe Biden failed to mention that the inflation rate soared once assumed office. Reaching a high of 9.06% in June, 2022. He also overlook the fact that the raised key interest rate worsened household debt.
This is not the only cause for concern. President Biden boasted “food inflation is coming down” and “Inflation has fallen every month for the last six months while take home pay has gone up”, ignoring that consumer loans and the Consumer Price Index are at an all time high.
President Biden’s recent comments seem to paint a rosier picture than the reality. While it’s true that the inflation rate has seen a slight decrease, it is far from being in control. The concern isn’t just the high inflation but the consistently high levels that we’ve been seeing. This isn’t a blip, it’s a trend, and a worrying one at that.
The intersection of high inflation, rising interest rates, and increasing household debt has put many Americans in a difficult financial position. Recent survey data indicates that 50% of respondents believe they are “financially worse off” compared to one year ago. Marking the most dismal results since the economic crash of 2008.
As households grapple with these challenges, it’s clear that the economic landscape in 2023 is fraught with uncertainty. The government’s next steps will play a pivotal role in shaping the economic future.
We stand at a crossroads in our great nation, a place where personal responsibility, financial self-sufficiency, and the American dream seem to be at odds.
What does this mean for us, the hard-working Americans? It means we need to buckle down and demand fiscal responsibility from our government.
The road to recovery is long and fraught with challenges. But with collective action and determination, we can weather this storm. After all, resilience is the hallmark of the American spirit. We need to channel that spirit to navigate these testing times. It’s time to take back control of our economic future.