NCPA - National Center for Policy Analysis

High Credit/Low Savings Could Bring Recession

August 19, 1997

Economist Robert M. Dunn, Jr. of the George Washington University predicts America's overuse of credit and low savings rate could bring on a recession.

Figures show household indebtedness has increased steadily for the last 20 years.

  • Total household indebtedness totaled 67 percent of disposable family income in 1980.
  • It rose to 83 percent in 1990 and climbed again by 1996 to 89 percent.
  • Today, almost a year of the average family's disposable income goes to paying credit cards, car loans, mortgages and other debts.

Runaway consumption has predictably caused a sharp increase in loan defaults and bankruptcies:

  • In 1996 there were more than 1 million bankruptcies filed.
  • Banks have written off about 7 percent of credit cards as uncollectable -- up a full percentage point from a year ago.
  • Defaults on FHA single-family home mortgages have risen 36 percent from 1995 to 1997.

Household savings have declined:

  • American families saved about 8 percent of disposable income from 1960-83.
  • That figure dropped to 5 percent in 1989, and to 4.8 percent as of first-quarter 1997.
  • Total domestic savings (including business and government) has decreased from 21.4 percent of gross domestic product (GDP) in the 1960s to just 15.5 percent so far in the 1990s.

Recession could be brought on by lenders putting the skids on uncreditworthy borrowers -- both domestically and internationally.

  • Bankers could tighten creditworthiness standards to increase collection rates.
  • Tightened lending standards would cause a decrease in consumption of consumer durables and other discretionary expenditures, and a recession would follow.
  • Foreign investors could find financing America's $150 billion per year interest payment on $1 trillion debt may not be such a sound investment.
  • If foreigners become unwilling to lend, the Federal Reserve Board would tighten money to defend the dollar, interest rates would rise, and a recession would follow.

Robert M. Dunn, Jr. (George Washington University), "Danger Signs for the Economy," Washington Post, August 19, 1997.


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