Consumer Debt Looks Set to Keep Soaring

Now more than ever, we are a debtor nation. And we're likely to borrow more in 2003.

Over the last 12 months, consumers racked up a record amount of personal debt, and with it record numbers of personal bankruptcies and foreclosures. And experts on personal debt and the economy say consumers will continue to spend.

"The consumer has been the hedonist of last resort," said Alan Levenson, chief economist for T. Rowe Price. "We expect that will continue to be the case."

That's bully for the 2003 economic outlook, since the consumer has propped up the U.S. economy as corporate America took a two-year breather from its information-technology spending binge. However, it raises long-term concerns for an economy whose foundation is mounting potentially unsustainable individual debt levels.

According to the Federal Reserve, Americans rang up a record $1.7 trillion in personal debt through October, with $724 billion of that in unsecured forms, such as credit-card debt. But as the chart (below) shows, rising debt is nothing new -- personal debt has only decreased once, in 1991, during the 50 years the Fed has been tracking it.

"I don't see us slowing at all," said Don White, a financial planning expert with the Million Dollar Roundtable, an association of financial sales professionals. "Do you have any idea how much money a trillion dollars is? $1.7 trillion is three times Russia's gross domestic product -- almost four times. Our total debt is three-and-a-half times [the market capitalization] of the largest companies in the world. That is frightening."

A Nation of Debtors? Since 1991, the total amount of personal debt has more than doubled in the last decade

* -- As of October 2002. Source: Federal Reserve

Even more frightening is the prospect of paying that debt off. If Americans were to stop credit-card spending completely, it would take decades to wipe out the $700 billion in credit-card debt currently owed. Assuming an annual percentage rate of 20% and a minimum payment of 2%, it would take 601 monthly payments -- or 50 years -- for America to pay off that much debt, racking up more than $3 trillion in interest in the process.