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Growing up in America, you learn to observe quite a few things. Officially, we are the richest country in the world. That is, if we go by GDP.
And yet, most of the U.S. lives on borrowed money. The average American has a debt that equals $90,000, and we continue to live our whole lives on loans. Which is simply how the system is set up. The more you borrow, the better you can make your credit score, which allows you credibility to borrow some more.
But borrowing isn’t a long term solution. All of that money needs to be returned and in this economy? It’s getting harder everyday. And yet, Americans can’t help but keep borrowing money. So, what’s going on? We’re discussing:
- Why Americans Love To Borrow Money
- The Economic Pressures Leading To Heightened Borrowing Practices
- The Relationship Between Borrowing And Consumption
Also read:
Why Is America So Dependent On Borrowing?
It isn’t farfetched to say America runs on borrowed money. Student loans, mortgages, leases on a car, every big purchase ends up requiring you to borrow some money to cover what should be basic needs.
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Everytime you use your credit card a.k.a. the most common way to pay, you’re actually taking a loan from your bank, promising to cover it later on. And most Americans aren’t taking out mortgages on a house everyday.
Credit cards help pay for groceries, for heating and basic rent. According to the Federal Reserve, U.S. household debt has increased by $174 billion in the past year.
In a way, debt has become a normal part of life in the U.S..
It’s why the credit score exists. Credit scores are how banks know that a person is responsible with their finances, by paying bills on time and covering what they borrow. Based on that, banks will allow you to take out bigger loans such as for housing or higher education, but at lower interest rates when compared to others.
Building a better credit score opens more opportunities while saving you money.
But it’s a bit of a double-edged sword, in which you have to keep being in these micro-debt situations to afford a better lifestyle. And now, credit card debt has hit $1.7 trillion across the country.
Why? Because the American people keep borrowing money to meet the rising inflation levels. Everything is only getting more expensive and our salaries aren’t matching up. In some cases, wage levels are practically stagnant.
Borrowing In The U.S.: An Ouroboros Situation?
After the pandemic, inflation skyrocketed around the world. And the same was true for the U.S., where the cost of living had gotten so high that most Americans live paycheck to paycheck.
And it isn’t just your average Americans either. The households that are making $150,000 per annum, are also barely scraping by.
It’s all because basic goods have gotten almost unattainable. Americans aren’t scared of having to buy a new house or lease out a new car. Not when most of their salary is eaten up by mundane purchases such as eggs and fuel.
When the financial crash of 2008 happened, people had a lot of questions. One of the biggest reasons that came up was American people borrowing money to live ‘above their means’. And there is some truth to that even today with the consumer expenditure rising nearly 5.9% last year.
But again, how can it not rise with how expensive goods have gotten over time? The U.S. saw its consumer price index increase by 2% just in the last 12 months.
So, Americans borrow more money from the bank just to survive. It’s how America became the world’s largest economy in the first place, due to consumer spending and subsequent borrowing. Our emphasis on a ‘cash free society’ or frictionless transactions makes it that much easier.
More and more families now rely on credit card payments to help them ride through this wave of high priced everything. So, is it any wonder why credit card balance amongst borrowers has been pushed to $1.13 trillion?
To be financially responsible in this climate means borrowing and repaying immediately. But how do you repay back the money when you simply aren’t making enough of it?
The way Americans are borrowing money, it’s like a snake eating its own tail.
Is Borrowing Good, Actually?
There is a flip side to all of this. We’ve discussed why it’s important to have a good credit score, and how that can help you in the long run with things like house pricing, auto interest rates or even rent.
Therefore, borrowing is a necessity in America. Some have gone as fast as calling America’s borrowing habits it’s ‘superpower’ – because it can return that money back and cement its value as a nation where investments are safe.
Borrowing supports consumption which leads to a higher GDP. It’s why U.S. household borrowing habits make up 63% of it. But because people are consuming goods at such a high rate here, businesses choose to invest more into the U.S., which creates more jobs and brings the money right back. Sort of.
People know that they are going to be in fluctuating financial situations throughout their lifetime. It’s just that they don’t want to be in the kind of debt that can be debilitating. The whole thing is called consumption smoothing. And while it is an interesting concept, American debt isn’t that simple to navigate through.
Borrowing does help households, to an extent. Children from low income households can access quality education through it and easily increase their annual income, covering said loans after working a period of time.
Buying a house on a mortgage with good interest rates means an asset that can be sold at a much higher price later on, once again negating the debt you took on to get it.
People can avoid that extreme fluctuation that comes with financial instability by borrowing against their future income levels and adopting a consumption level that stabilizes as time goes by.
Small loans can be the make or break point for many families in the U.S.. And it’s affordable money borrowing that helps promote economic equity. So, Americans will continue to borrow until the economy suggests otherwise.
