The average American family has tightened its wallet in many areas. And yet, it is still fragile.
Most of the problems we have today came from yesterday's solutions. That's simply how systems work. For years, the country prospered because of rising real estate prices. Alas, it was those very same prices that helped precipitate the Great Recession.
Using this line of thinking, you can find the seeds of tomorrow's economic downturn in today's good news.
Between late 2007 and 2011, America went through a great deleveraging process. Businesses and everyday households had to pay down their debt to make themselves less financially fragile -- immune to the whims of creditors who, themselves, were hard up for cash.
Over the past four years, that has changed. People are spending more. In general, we like this: it stimulates the economy and creates jobs. But we are starting to see the average American household taking on more debt. And that makes us increasingly more fragile to the next downturn.
Take a look at average household debt, using statistics from the New York Federal Reserve and analytics firm Statista.
Average American Household Debt | Create infographics
If you click on both tabs, you can see that while debt associated with mortgages has fallen and stabilized, the amount of debt that the average household is carrying for things unrelated to housing has decoupled, and grown markedly. In fact, it sat over 17% higher at the beginning of 2015 than it was in 2011.
Nonhousing debt can be broken down into four broad categories: student loans, credit cards, auto payments, and other. If we look at the data in more granularity, we see where our prime sources from fragility are coming from.
Average American Household Non-Mortgage Debt | Create infographics
A few things should stick out from this. First of all, Americans have generally done a good job in cutting down on "other" and credit card debt. This is especially important when it comes to credit card debt, as the interest rate on these cards is usually north of 10%.
Second, the average American household's auto payments have increased sharply. Between 2011 and today, these payments have moved 32% higher. While it's understandable that people need a vehicle to get around, the average household might want to carefully consider the costs of newer cars.
But by far the biggest takeaway is the role of student debt. Back in April of 2012, I wrote a piece about how we were educating ourselves into shackles. Since then, average debt loads have continued unabated. Overall, the average American family saw its student loan payments increase 150% between 2006 and today.
What the average family can do to become antifragile
While some may argue that education is "good debt," there are some key lessons that anyone can draw from these results. Consider these carefully before making future student loan decisions.
- For-profit schools played an outsized role in the student debt problem. Many of these schools are now seeing enrollment numbers drop as the government squeezes down on them and students look elsewhere.
- Student loan debt is not erased through personal bankruptcy. It will stay with you forever.
- Where you go to school doesn't matter nearly as much as what you do once you are on the job.
Perhaps the most counter-intuitive take on the situation comes from Nassim Taleb, author of bestsellers The Black Swan, Fooled by Randomness, and Antifragile. In the latter book, he argues that while a formal education can do a good job at securing an individual's spot in the middle class, it does little for society as a whole.
While education -- the act of learning inside or outside of the classroom -- is important, he skeptical of, "the brand of commoditized, prepackaged, and pink-coated knowledge, stuff one can buy in the open market and use for self-promotion. ... Scholarship and organized education are not the same."
Following this argument, simply choosing to get an education via other modes -- apprenticeship, mentoring, starting your own business, etc. -- is a much better bet. While you probably won't strike it rich at first, you'll be getting real-world experience that is usually more applicable than what you get in the classroom. And more importantly, you'll be making lots of little mistakes -- the stuff that real education is made of.
From a financial standpoint, you'll avoid crippling debt, and come out the other end with valuable lessons. I'm not saying this route is for everyone, but given the role that student debt is playing in making us all more financially fragile, it's an obvious and overlooked option that deserves more consideration.
