US consumer debt grows by a whopping $3.8 trillion since 2001

 Note: When I posted this morning, I indicated the consumer debt number was $3.1 trillion. I later realized that it was in fact $3.8 trillion. This was my mistake, so this post has been updated to reflect the correct numbers.

Lately, when I work out in the morning, I’ve been tuning in to Bloomberg TV with Eric Schatzker, as broadcast on BNN (Business News Network). This morning I was shocked to hear the US consumer debt load is $3.8 trillion (that’s $3,800,000,000,000 if I am not mistaken and… yes, that’s a load of zeros!) OVER 2001 levels. To fully understand what this means… it’s not that consumer debt is $3.8 tril, it’s that it’s $3.8 tril HIGHER than it was in 2001. Ouch!

Based on a US population measure of 303,824,640 (July 2008), that’s an increase of $12,507 in debt for every man, woman and child in the US, or $50,028 for a typical family of four over the 2001 levels. That’s just consumer debt, folks. The kind we carry on our credit cards and lines of credits to buy doodads — a favourite expression of Robert Kiyosaki‘s, author of Rich Dad, Poor Dad [Canadians click here] — and does not include things like mortgage debt or investment debt. And since most four year-olds don’t carry credit cards (yet), that cost is being shouldered by their hard-working, trying-to-make-ends-meet parents. In 2007, the US median family income was $58,480 before taxes. As an example, if you take a family that pays a combined rate of 40% in taxes, they are left with $35,088 a year to cover all of their living costs. So, their annual take home pay is smaller than the debt they owe, not including interest on that debt (the expression for measuring the amount someone owes versus what someone earns is called the debt-to-income ratio). Looking at this, it’s easy to see why people feel like they can’t get ahead, become apathetic, perhaps indulge in some retail therapy to forget their woes, and plunge further into debt. It’s a dark, vicious cycle.

That $3.8 trillion is approximately one third of America’s GDP. Gross Domestic Product (GDP) is the market value of all final goods and services produced within a country during a given time period. That means there has been plenty of stuff bought on credit these last few years in the States, which contributed both the recent boom, and bust when that credit became harder to pay off.

Watch the Bloomberg TV interview with Ira Jersey, Head of US Interest Rate Strategy at RBC Capital Markets, beginning at 4:58. From that point on, the clip lasts about three minutes.

Wow.

Now to someone fighting the war on useless debt, this really hit home for me how much society needs to improve its financial knowledge. This is one area where ignorance isn’t bliss. It’s costly. We’re financially sick, and knowledge — then action — is the medicine.

Remember: “Those who understand interest earn it; those who don’t pay it!”

So, if through my information and blog posts I can get one person to change their financial outcome, I’m one person closer to my goal of helping society as a whole!