Good news: we're getting our debt under control. Americans' household balance sheet no longer remains hopelessly unbalanced but shows its lowest debt in six years.
Total U.S. household debt, including mortgages and credit cards, fell for the second straight year in 2010 to $13.4 trillion, according to the Federal Reserve.
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Our total debt is 116% of our disposable income, compared to 130% in 2007. A healthy ratio is 100% so we are headed in the right direction.
Household net worth is on the rise too -- another good sign. Rising 401k values helped push average net household worth to $505,000, down from the highest of 2007, but up 5% from 2009.
But it's not all hearts and flowers. One way consumers have reduced their debt is by walking away -- throwing up their hands at mortgages and credit cards.
Those defaults may have helped consumers, but banks had to write off $118 billion of mortgage and credit card debt last year. Some people are doing the right thing -- paying down debt and boosting savings -- the personal savings rate skyrocketed to 5.8% last year from a low of 1.4% in 2005.
Unfortunately, Uncle Sam hasn’t learned the same lesson. As Americans have sought to lighten their debt burden, the federal government has been doing just the opposite -- spending well beyond its means. Total government debt has risen to $14 trillion. In February alone, the federal government ran a deficit of $222.5 billion-- the highest for any month ever. March will probably be worse.
There are two big reasons for this debt. First, tax revenues plummeted like a stone during the recession. Taxpayers, individual and corporate, have lower tax bills when their income falls.But a bigger reason is this: we pushed our spending to new highs after Lehman Brothers collapsed in 2008 to bail out the banks, the auto industry and the rest -- and we haven't yet paid back that bill.
Why can't the federal government be more like taxpayers and fix its balance sheet? We are all going to pay -- and soon -- if that doesn't happen.