If the U.S. Congress, or for that matter the Irish or Greek or Spanish governments, are looking for inspiration—or spine—as they embark on painful road to deficit reduction, they need look no farther than the American people.
In one of the most dramatic fiscal shifts in U.S. history, Americans are beginning to kick the debt habit, and de-lever their family balance sheets. Household debt as a percent of GDP fell roughly 6 percentage points from the first quarter of 2009 to the second quarter of this year. That’s the biggest drop in post-World War II history.
Of course, with household debt still at over 90 percent of GDP, versus 49 percent in 1980, Americans are still highly leveraged. But the direction is encouraging.
Household borrowing has fallen for the seventh straight quarter, according a recent report from the New York Fed. Faced with a triple whammy of slow economic growth, falling home prices and a manic stock market, consumers have taken matters into their own hands, reducing their debt burdens by nearly $1 trillion since the third quarter of 2008.
So, if the American people can do it, why can’t the Congress muster the gumption to attack a $1.3 trillion federal deficit?
Interestingly, one way consumers did it was by cutting up their credit cards (or tucking them away) and shifting to cash or debit cards. Last year, for the first time ever, the volume of transactions processed through debit cards exceeded that for credit cards. And this holiday season, nearly 70 percent of consumers in a recent survey said they would use debit cards or cash; only 9 percent plan to rely on revolving credit.
If the American people can put their families on a slimmed down, pay-as-you-go budget – even when it hurts – Congress should be able to do the same.
Click here to visit the Debt Watch home page.