Debt service payments and disposable income

Great news out of the Federal Reserve last week. Our debt service payments as a percentage of disposable personal income are at lows not seen since the 1980s. If you aren’t familiar with this statistic allow me to explain. Debt service payments are any payments you make each month towards a debt. Disposable personal income is exactly what it sounds like. So it’s a good thing if less and less of our disposable income is going towards paying down debt. It certainly sounds like we’re on our way to recovery.

But, if you’re reading the chart above you might notice something. The blue line is aligned to the left and you can see our debt service payments as a percentage of income have dropped from highs near 14% to about 10.6%, near all time lows. The maroon line is aligned to the right axis and it’s showing the 10 year Treasury rate over time. It’s a good proxy for what the prevailing interest rates are in the US. As you can see here the 10 year Treasury has NEVER been lower than it is right now. That means the interest we’re paying on our debt is likely at record lows too.

This has been a focus of the Federal Reserve for quite some time. They keep rates low so we are enticed to borrow. The added benefit is that we can refinance our current debt. It’s only natural that at some point our debt service payments would reach new lows.

What you’d like to see is the decline in debt service payments as a result of consumers deleveraging. That shows that we’re finally learning our lessons about borrowing money (at least for a decade or so). But instead, all we see here is the possibility that the only reason our debt service payments are down is low interest rates.

Thankfully, other charts show what we should really care about. That is our total debt actually falling as a percentage of GDP. This has been in a steady decline since the recession began.

One head scratcher for you before we go: it’s obvious at this point that Americans are borrowing less money and being more responsible. But it’s also obvious that our government is borrowing at record levels. Some say the government stepped in to borrow when consumers wouldn’t. What happens when the government stops borrowing?

Read: U.S. household debt burden hits 29-year low

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categories: economics, loans, personal finance