Debt Levels Rise as Americans Struggle to Stay in the Middle Class

In the past decade, there has been a debt surge due to relatively stagnant incomes and a drastic increase in consumer spending. According to the Wall Street Journal’s, “Families go deep into debt to stay in the middle class”, “Consumer debt has reached an all-time high of $4 trillion even after adjusting for inflation.” Americans are willing to keep going deeper into debt to simply maintain their middle-class lifestyle. However, maintaining this middle-class lifestyle comes with consequences as prices of goods continue to rise and consumers put more on credit. Some of the biggest sources of this debt include student loans, auto loans, and mortgages. As referenced in “Families go deep into debt to stay in the middle class”, student debt has reached an all-time high of $1.5 trillion last year and auto debt is up 40% adjusting for inflation in the last decade with $1.3 trillion.

This rise in consumer spending and growing consumer debt is a sign of increased consumer confidence in the future. Plus, with the Federal Reserve lowering interest rates this encourages consumers to move money out of their bank accounts and into the economy. This also motivates consumers to use credit as they feel more secure in their jobs. However, it is essential that the accumulated debt and consumer spending is managed to prevent the economy from growing at unsustainable rates. If unemployment remains low, the debt pile should be manageable; however, if unemployment rates begin to rise it would increase the chances of missed payments by consumers and lenders writing off unpaid balances. In turn, this would could lead to a contraction in the economy.

As stated in, “Families go deep into debt to stay in the middle class”, “Median household income in the U.S. was $61,372 at the end of 2017, according to the Census Bureau. When inflation is taken into account, that is just above the 1999 level.” These relatively stagnant incomes are paired with average housing prices that have risen 290% since 1999 and average tuition prices at four-year public colleges rising 311%. It is becoming drastically more expensive to afford a middle-class lifestyle. Assets such as houses increasingly turn into liabilities as Americans go hundreds of thousands of dollars into debt to purchase a home.

The rise in consumer borrowing has also widened the wealth gap. In most cases, it makes sense to take out a mortgage for a house that could appreciate or boost your potential earning income with student loans for a college degree. However, many Americans borrow for everyday use such as clothes or for cars that lose market value. This, in turn, makes it harder for Americans to save and invest in stocks and real estate to create wealth. Even though Americans have gotten wealthier in the past few decades, gains in assets owned were mainly by the upper class. In fact, according to “Families go deep into debt to stay in the middle class”, “Put differently, the value of assets for all U.S. households increased from 1989 through 2016 by an inflation-adjusted $58 trillion. A third of the gain—$19 trillion—went to the wealthiest 1%.”

Many middle-class families who want to live in quality neighborhoods with good schools and prime locations are not able to afford buying these houses. Instead, many families are increasingly renting single-family homes. Domonic Purviance, a senior financial specialist at the Federal Reserve Bank of Atlanta stated, “That is a radical shift in the structure of the market. What we may have to prepare for in the future is that buying a new home, and in some markets even buying an existing home, may become a luxury.”

Beyond the housing challenge many Americans are facing, if the economy is on an economic downturn, these high debt levels of the middle class could hurt the economy for an extended period of time. The reason for this is because people who have debt when the economy contracts will rein in their spending in the long term.

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