While very recent economic news shows some long-overdue strength – gross domestic product grew at an 8.2% annual rate in the third quarter – mounting levels of both public and private debt remain a concern, both for the near future as well for the long-run health of the economy.

In the second quarter of 2003, household debt increased at an 11.5 percent annual rate, the largest increase in 15 years, according to the Federal Reserve. Total household debt is now nearly $9 trillion and has gown by over 50 percent from 5 years ago. Debt service payments have been steadily growing over the past 10 years (see graph)

Source: Federal Reserve Bank of St. Louis.

As one might expect, this increase in household debt is associated with an increase in bankruptcies over the past 10 years. In fiscal year 2003, non-business bankruptcy filings totaled 1,625,813 – the highest on record, and up 98 percent from 1994, according to the Administrative Office of the US Courts. The graph below shows the dramatic upswing in the number of non-business bankruptcy filings.

Source: American Bankruptcy Institute and Administrative Office of the U.S. Courts

The increase in the total household debt is worrisome because greater debt is a sign of lower savings rates. A lower savings rates means there is less money available to invest for future economic production, which is potentially harmful to the economy’s long-run prospects. Figure 2 shows the U.S. personal savings rate over this same 10-year period. Over this period, the savings rate has been cut in half.

Source: Bureau of Economic Analysis

In the late 1990’s the decline in private savings was partially offset by the federal government’s “public savings,” since he federal government was running a surplus. Currently, with the federal government returning to massive deficits, total savings – the sum of private savings and the government surplus – has suffered greatly. The following graph shows how the overall saving in the economy has dropped substantially after improving throughout the 1990s. The overall savings rate is now the lowest since 1945 -- at less than 14 percent of GDP.

We need to address the long-run health of the economy by boosting overall savings – running a responsible fiscal policy and shoring up the revenue of the federal government is a necessary component of this effort.

Source: Federal Reserve Bank of St. Louis.