The Long Term Effects of Consumer Debt
Looking down the road, we see what the current debt load is going to do to our economy. At its current rate, if consumers continue to spend using
borrowed funds, we will reach a point in our economy where no one will have any disposable income for additional purchases. What that means is that
everyone will be spending all of their disposable income on repaying debt and will have no money left to paying for things that they do not have to
Does that mean that our economy has the potential to crash? The potential, yes, but fortunately with safeguards in the economic structure, before it
happens, we have ways to prevent it such as the Federal Reserve Bank stepping in to lower prime rates in order to encourage spending. For those
who have credit cards with variable interest rates, the reduction in the prime rate will have a positive effect on their ability to repay credit card debt. It
means the banks and other lenders can lower interest rates, thus consumers can borrow money at a more favorable rate and make purchases that
they thought they could not afford.
On the other end of the scope, an increase in consumer debt also increases the potential for people to file bankruptcy. The detrimental effects on the
economy may not be felt for several years since those being hit the hardest by these filings are the lenders to whom the consumers owe money.
Retailers are not likely to be affected directly, though they may feel the effects as lenders tighten up their lending policies due to an increase in
monetary losses because of bankruptcies and bad debt write offs. Initially the effects may not be felt because those who are filing bankruptcy or failing
to pay their bills will be using cash to buy things that they need and want. They will have the income because they will not be paying off their consumer
debt. Over time the losses will take their tolls - stores will have to raise prices, banks will have to increase interest rates, and both lenders and credit
card issuers will tigh