Is Consumer Borrowing Excessive?

Are consumers too heavily in debt today? Have they jumped in over their heads? Certainly, the total volume of household debt outstanding is huge in both absolute terms and relative to most other sectors of the economy. However, to judge whether consumer borrowing is really excessive, that debt should be compared to the financial assets consumers hold. These assets, presumably, can be drawn upon to meet any interest and principal payments that come due on consumer borrowings. That while the volume of consumer debt has increased rapidly in recent years, the volume of household financial assets also has grown rapidly. For example, in 1980 financial assets held by U.S. households exceeded their outstanding liabilities by about $3 trillion. Moreover, the absolute size of that financial asset cushion has increased dramatically over the past three decades. In 1970, for example, the spread between household financial assets and liabilities was 1.4 trillion and in 1960, only $742 billion.
When we measure the ratio of consumer liabilities to financial assets, however, the picture is not so optimistic. This ratio has nearly doubled since 1950, increasing from less than 20 percent to more than 30 percent. Whether the liability-financial asset ratio has reached an "excessive" level depends, of course, upon economic conditions and the educational level and degree of financial sophistication of individuals and families. If the average consumer today is better educated and more capable of managing a larger volume of debt, a higher ratio of liabilities to financial assets in household portfolio is probably not an alarming development. Moreover, the total wealth held by consumers includes not just their financial assets but also their real estate-homes, automobiles, furniture, etc. while we have no really reliable measure of the volume of real estate held by consumers, it is obvious that the total wealth of individuals and families (including both and financial assets) far exceeds their debt obligations.