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The Ugly Reality of Lowering Debt by Default

From CNN/Fortune.

"It turns out that many households aren't exactly tightening their wallets and using all their saved cash to pay down debts. They're simply defaulting on them."

...

"Shedding away debt - however it's done - is critical to the overall health of the economy. But the wave of households de-leveraging by default is worrisome. And many Americans are using their new savings to buy up U.S. Treasuries instead of devoting it all toward paying down debt. During the past year, households bought 42% of the new Treasury debt issued, equal to about $616 billion and far more than the $432 billion absorbed by foreign investors.

This will probably prolong the de-leveraging process further, say analysts at Capital Economics. Until households can meaningfully shed off debt, it will likely be one of the key factors stalling economic growth and the job market as many companies wait for GDP to pick up significantly before hiring more workers."

...

"...consumers haven't exactly discovered a newfound sense of frugality. In 2009, outstanding credit card debt dropped by about $93.2 billion compared with the previous year, according to a report from CardHub.com, a credit card comparison website. This might sound like good news, but the reality is that the majority of the drop -- $81.6 billion -- is due to Americans defaulting on their debt.

So the real decrease is much smaller - about $11.6 billion - and much of that came during the first quarter when many people used tax returns to pay down card debt. At this rate, CardHub.com predicts consumers in 2010 will actually accumulate at least $26.2 billion more in credit card debt over last year.

"It's alarming," CardHub.com CEO and founder Odysseas Papadimitriou says. "We cannot revert to pre-recession debt levels."

...

"So while consumers' debt burdens might technically be less today than they were just a few years ago, at least on paper, the burden is still quite heavy on the minds of consumers."

So they're just kicking the can down the road--taking the credit record hit NOW so they can run up debt again sometime in the future, and walk away from it again. Is this easier than learning how to tighten the belt, buckle down, and stick with it for some spare CASH every month? It's certainly not more fun!

Posted by Cute at 5:45 PM

Labels: financial (non-tax)