It appears that the average American household is less crushed in debt today, than when the huge financial bubbles based on household mortgage debt blew up the world economy in 2007-09. At that time, total household debt in the United States had risen during a decade and a half following Glass-Steagall’s destruction and complete financial deregulation, from $3.5 trillion in 1991 to $13.2 trillion in 2007, almost four times as big a bubble of debt to carry. Mortgage debt had quadrupled over that 16-year period, and other categories of household debt had tripled. Worst of all, the ratio of household indebtedness to disposable personal income went from 80% in 1991 to 130% in 2007. In the latter year, household debt was 400% of disposable income for the lowest income quintile of the American population; 250% of disposable income for the second-lowest quintile, and 200% for the middle quintile. Banks were loaded with various forms of household debt, debt securities, debt derivatives, off-balance-sheet debt vehicles – all of which were prohibited to them by Glass-Steagall enforcement, and all of which were defaulting.
As of the end of 2020, total American household debt at $14.6 trillion was even higher than in 2007. But American households’ total disposable income was considerably higher, at $15.7 trillion; so the burden of debt to disposable income did not seem to be as crushing as in 2007, when Americans started defaulting in large numbers.
But if we look at those quintiles of the population by income, the tremendous growth in income inequality since 2007 — in the current era of Federal Reserve money-printing — changes the picture. The ratio of debt to household disposable income, and therefore the ability of households to pay their debts, is better than in 2007 for only the upper two quintiles; for the other three quintiles, it is worse. For the lowest-earning quintile of households it is approximately 500% according to Federal Reserve and U.S. Census figures. For the second-lowest quintile of households that ratio is approximately 300%; and for the middle quintile, 210%.
