Drowning in Debt

America's GDP growth is predicated on a rising tide of personal and federal debt. With rising interest rates and stagnating incomes, with retiring baby boomers and outsourced industries, it remains to be seen whether the economy can withstand a storm on this sea of red ink.

We've posted on the enormous federal deficits and their relation to growth. (See the "Net GDP" post.)

Now, according to a recent report by the Center for American Progress:

"America's middle class is drowning in debt. A typical middle income family earning around $45,000 a year saw its debt burden grow by 33.1% between 2001 and 2004, even after adjusting for inflation. Debt relative to income rose even more, to 33.9%, during this period for middle income families. Personal bankruptcies among these households are rising steeply.

"The reasons for greater economic distress among middle class households are not hard to pinpoint. Slow income growth ... has not kept pace with the rising cost of big ticket items such as housing and education loans, medical expenses and transportation...."

Increased debt is being generated not by profligate credit card spending, as noted, but by borrowing for big ticket items -- homes and education. For the first time debt has exceeded income, and in spite of low interest rates, debt payments are higher. Highly indebted households continue to grow in number, with one in seven households making debt payments greater than 40 percent of income.