The debt gap further separates consumers from rich

Wednesday, May 2nd, 2012 By

Debt

Student loans create only part of the debt that follows lower-earning consumers throughout life. Image: DonkeyHotey/Flickr/CC BY

The previous year of presidential campaigns and Wall Street occupations has shined a great big spotlight on the income gap between the super-rich and everyone else. A new report points to yet another equality gap between the wealthy elite and the struggling majority. Namely, a debt gap that has been widening for decades.

Debt rising for consumers

The typical American consumer is buried in debt. The lower-earning 95 percent of American consumers owed 62 cents of every dollar they earned in 1983, according to the International Monetary Fund, which sponsored the study. However, by 2007 that ratio had risen to an insurmountable $1.48 of debt, when compared to each $1 dollar of income.

Although that ratio has improved slightly since before the Great Recession, much of that debt reduction is the result of bankruptcies and foreclosures, according to Michael Kumhof, deputy division chief at the IMF.

Debt on the wane for super-rich

On the other hand, the top five percent of the nation’s earners have seen a reduction in debt over the past three decades, says the report. In 1983, the super-rich owed about 76 cents of each dollar earned. By 2007, that had fallen to 64 cents on the dollar.

As the income gap between the average consumer and the top-earning five percent continues to widen, so does the disparity of debt. As the rich get richer, they have less reason to borrow.

Robert Reich, the former Labor Secretary under President Clinton, said of top-earners:

“They are in quite good shape. They don’t need to borrow.”

Lending ‘back to the majority’

Meanwhile, with a surplus of wealth, those top-earners invest that money by creating more borrowing opportunities for consumers.

According to Kumhof:

“Rich people have more money to play with and there are only so many Armani suits they can buy. So they can lend money back to the majority.”

Wages stagnate, costs rise

Wages have remained about the same for the typical American over the past 10 years, but inflation has continued to grow. Many consumers have been forced to borrow more just to keep going.

Reich said of consumers:

“The only way they could continue to purchase what they need was to go deeper into debt.”

As a result, consumer debt has risen by 1,700 percent since 1971, according to Market Oracle.

And so the gap widens.

‘Trickle-down consumption’

Another factor exacerbating the problem is the phenomenon of “trickle-down consumption,” as documented in a March study from the University of Chicago’s Booth School of Business. As the nation’s top earners find their income increasing, they spend more. With every 10 percent spending increase seen from top earners, the lower 95 percent spend 2.5 percent more.

The research speculates that up to 25 percent of the reduction in the typical consumer’s savings over the previous decades could be the result of this phenomenon.

A historical indicator?

Kumhof and the IMF report go on to warn that this documented disparity may be a significant economic indicator of continued hardship.

A pattern of a widening debt gap between the rich and the average consumer was observed twice before in the American economy. Namely, in the late 1920s before the Great Depression, and in the late 2000s, before the Great Recession.

Sources

Huffington Post
CNN 
Huffington Post

Market Oracle: http://www.marketoracle.co.uk/Article31784.html

Previous Article

« Staying at a more expensive hotel could save you money

When you are traveling, it is easy to drop the equivalent of a month’s rent on a few nights in a hotel. Taking a holistic view of your stay, however, could mean that an expensive hotel could save you money. Consider all the costs of traveling Traveling does not exist in a [...] Small Kitchen
Next Article

12 months to a better financial foothold »

Making big financial changes can be difficult, because they include changing long-held habits. Changing just one thing per month, however, can be an easy way to give yourself a more secure financial foothold. Month 1: Eat out less Make an effort to eat out less often in your first month. This doesn’t [...] Calendar