There was a story in yesterday's news about the decline in the amount of debt American households have taken on, as the total amount of consumer credit fell by a whopping $21.6 billion in July, a record for a single month. The stories came with some concern over whether this might be troubling for the economy.
Most of the time, of course, we are bombarded with the opposite message: Americans spend too much and take on too much debt without saving enough. And while carrying excessive credit-card debt isn't a wise move for an individual, in the aggregate, credit creates wealth. Free-flowing credit from banks creates wealth for businesses, and using credit cards can help create wealth for individuals as well. Think about it: If you make $100,000 in a year, and end the year with $10,000 in credit card debt, you've spent 10 percent more than your salary would have otherwise allowed. If you're concerned about losing your job, and thus end the year without any credit-card debt, you've spent around 10 percent less than you otherwise might have. If everyone's purchasing power declines by 10 percent, we've got a recession on our hands.
Let me stress that I'm not suggesting that you go out and buy a bunch of big-ticket items on your credit card for the good of the nation. It's sort of a tragedy of the commons problem: What can be a bad thing for people to do, taking on a lot of debt, can be good for the economy as a whole.
The other thing to point out is that the sky-high credit-card rates we noted the other day have had their own deleterious effect on the economy. If credit card rates were lower, people would borrow more, and the economy would be stronger. And we'd all be better off - even the card companies.
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