August 22, 2001

Debt Crisis Not Abating

The mountain of debt that US consumers have managed to pile up will become insurmountable as the economy sinks further toward recession. Sure, consumer spending is slowing and recent data show that consumers are taking on less new debt, but the huge outstanding balances from a decade of frenzied spending will not miraculously disappear.

Consumers collectively owe $7.3 trillion in debt, including mortgages, credit cards, home equity loans, and auto loans. And increasing unemployment, along with disappointing investment returns compared to recent years, are making it harder for Americans to stay afloat. According to Moody's, credit card delinquencies in the second quarter rose to 5% from 4.3%, and card write-offs increased to 6.4% from 5.6%. In the first quarter this year, 356,863 Americans filed for personal bankruptcy -- an 18% increase over the previous quarter.

We think those numbers could get even worse in the months ahead. As we said in the July issue of Safe Money, "In nearly every recession of the 20th century, personal bankruptcies did not peak until the tail end of the recession." With 32 million families -- or 80 million people -- running an annual average deficit of $8,160, it is a real possibility that as many as one in threehouseholds could file for bankruptcy as this economic slowdown progresses.

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