In the midst of a financial crisis, the likes of which the U.S hasn't seen in more than 50 years, an interesting side effect has taken place: Consumer debt has declined. This trend, startling for a country that has long relied on credit cards, may be an indication of a nationwide shift in spending habits.

For years, economists have warned us of our over-reliance on credit cards. These warnings have fallen on deaf ears, as Americans are a people who love buying things with money that they don't have. Or, at least they were. The housing market slump and the subsequent Wall Street meltdown have changed their tune.

Decline in household debt

The Federal Reserve reported that household debt declined 0.8 percent in the third quarter, a number attributed primarily to the 2.4 percent decline in mortgage debt.

Does this decrease indicate a change in consumer behavior? If it does, it's only because market forces have driven consumers to alter their money management habits. The primary driver behind that change is the decrease in home equity. Homeowners' equity, as a percentage of the value of their properties, dropped to just 44.7 percent, a figure that hasn't dipped below 50 percent since 1945.

The deep decline is a result of the slumping home market. In the past, it's been much too easy for homeowners to tap their equity for a home improvement or debt consolidation loan. As banks have tightened their lending guidelines, and as home values have decreased, the ability to acquire more debt has vanished.

Lower consumer debt a good thing?

Economists should be elated over the decline of household debt, but there are complicating factors. The economy is in a terrible decline. A recession has much to do with consumer confidence and, at the moment, the collective spirits of American consumers are scraping bottom. This has posed a classic catch-22: Consumers need to save more as a nation, but if they start saving, they imperil the economy.

The nation's leaders are floating out all types of stimulus packages, and the Fed keeps lowering interest rates, so it's clear that Washington hasn't lost its taste for debt. But the declines in consumer spending may indicate a paradigm shift that elected officials should watch carefully. A long-term correction may be taking place in which people are heeding the words of astute money managers: Save more than you spend. Keep three to six months of cash on hand. Use your home equity only in an emergency.

What if this is a long-term trend? In the short run, it will be painful. A slumping economy forces employers to cut back, which results in increased unemployment and the potential of deflation. But over the long haul, it may begin a trend toward more responsible savings practices. The U.S. may have been a military superpower, but its ability to save has always been a joke. However, the decline in consumer debt may indicate that Americans are ready to get serious about savings.

Published on January 16, 2009