Academic journal article ABA Banking Journal

The "Less Worse" Outlook

Academic journal article ABA Banking Journal

The "Less Worse" Outlook

Article excerpt

A FEW LONG YEARS AGO, WE were living in an economic boom that was driven by the availability and use of easy credit. This provided a feeling of wealth that encouraged robust spending on choices as varied as vacations (Disneyworld, cruise lines), designer clothes, and home entertainment rooms. Today, we are in a credit hangover which likely points to an historically slow economic recovery.

The Consumer Financial Obligations Ratio is one of this economist's most closely studied indices. It shows the ratio of: 1. required monthly payments on consumer debt and other obligations such as homeowners insurance and property taxes to 2. personal income after tax. This index has stayed close to the all-time high, roughly 19%, for the past four years (top chart). Today, many consumers are in debt up to their ears.

When consumers were paying with plastic at record rates, the relative amount of income that was dedicated to savings decreased. For much of this decade, the U.S. savings rate was virtually 0% (bottom chart). In contrast, in January and February 2009, the savings rate jumped sharply to about 4% and is likely headed much higher. …

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