Consumers going deeper into debt

Happy days are here again, or so it would appear.

Since 2008 consumers have been paying down their debt and not taking out so much new debt, in part because banks weren't lending. But there appears to have been an abrupt shift. Consumer debt is on the rise again, and so in fact is corporate borrowing.

Of course, not all debt is bad. If it's manageable it allows the consumer to increase purchasing power. Those purchases can stimulate the economy.

In its latest report on consumer credit, the Federal Reserve notes consumer debt increased at an annual rate of 5.5% in August. Revolving credit - things like credit cards - decreased at an annual rate of 1.25% while non-revolving credit - things like car loans -- increased at an annual rate of 8.0%. 

Student loan debt up 61%

The Fed's numbers show consumer credit surpassed the $3 trillion level in the second quarter of the year and has yet to show signs of slowing down. It has risen 22% since 2010. But in addition to buying new cars, Americans continue to go into debt to attend college. In the last three years student loan debt is up 61%.

Credit card debt is among the most expensive there is, with the average rate north of 14%. But since the financial crisis of 2008 revolving debt, which includes credit cards, has been steadily going down.

For example, in 2008 revolving credit debt totaled just over $1 trillion. By the end of 2012 it had fallen to $845 billion.

Non-revolving debt has been increasing in the last five years. It stood at $1.6 trillion in 2008 and by August was running at an annual rate of $2.1 trillion.

Expanded purchasing power

Both businesses and consumers use credit to purchase things that they otherwise would not be able to buy. A house is a good example. Very few consumers can come up with $200,000 to purchase a house so they take out a mortgage for $160,000 to $180,000.

On one hand the availability of credit has an inflationary impact. If no one could borrow money to buy a house then houses would have to cost $10,000 to $20,000 or no one could afford them. But if houses were that cheap then builders could only pay their laborers pennies per hour and could only pay pennies for materials. So the lack of credit can have a deflationary impact.

That's what economic policymakers feared after the 2008 financial crisis when there was little credit available at any price. The fact that both consumers and businesses are able to borrow again - and are doing so - is going to be greeted as good news, as long as the credit is manageable.

Worries about college loan debt

Currently, the biggest worry about unmanageable credit is in college loans. That total has now surpassed the $1 trillion mark, according to the Consumer Financial Protection Bureau, which has voiced concern about how students will be able to repay their debt.

The agency is not alone. The Institute for College Access and Success estimates the average student will graduate with a loan balance of $26,000. Ten percent are expected to run up more than $40,000 in loans. 

Some economists worry student loan debt is a giant iceberg, waiting to sink not just students but the U.S. economy. True, the debt makes it hard for young people starting a career to buy cars, homes and other things that can help stimulate the economy.

But there is also a bigger worry. Since much of the student loan balance is guaranteed by the U.S. government, it's the U.S. taxpayer that takes the hit if these consumers default.