The economy of the United States is the wonder of the world. Growth is a perennial favorite, banishing all who expect anything less to the margins of pessimism’s dungeons. Ours, dear readers, is an era of economic resilience. The reason, as always, is that our hero, Joe Sixpack, is willing to spend till he’s red in the face (and on his balance sheet). Representing some 70% of the nation’s GDP, Joe and his counterparts are collectively the engine that defines and drives American economic muscle.
Joe’s inclination to keep spending these days, in turn, is powered by an inclination to keep borrowing, which corporate America has seen fit to make progressively easier over time without regards to creed, color or credit quality. The Federal Reserve this month put a new number on the extent of Joe’s readiness to engage in the most popular of American financial transactions: spending someone else’s money. In the first quarter of this year, the growth of household nonfinancial debt jumped by 11.6%, on a seasonally adjusted annualized basis, according to the Fed’s Flow of Funds report. That’s near the fastest pace of recent years, and well above the 6%-to-10% range of increase that prevailed during the latter half of the 1990s, a stretch that was no stranger to robust economic growth.
The Federal Reserve conveniently breaks down Joe’s fondness for red ink into two main categories: home mortgage and consumer credit. As the chart below reveals, ’tis the home mortgage category that’s doing the heavy lifting in elevating household debt to levels that worries some but otherwise encourages others.

In any case, home mortgage debt advanced by 13.6% in the first quarter, far above the relatively paltry rise of 2.2% for consumer credit. But what are we to make of the sizzling gain in home mortgage debt?
Perhaps, the optimists say, the mortgage debt isn’t quite as red as it appears. Buying homes, after all, incurs debt, but debt that funds an appreciating asset is something to be praised, as opposed to taking out loans for cars, televisions, and furniture, all of which drop in value as routinely as water flows downhill. Ergo, there is good debt and bad debt, and woe to the analyst who doesn’t make the appropriate distinction.
So be it. The Capital Spectator has come to praise enlightened borrowing, not bury it. But when is too much of a good thing too much?
In search of an answer, or at least the crumbs of a clue, let’s observe that home mortgage debt, as the Fed defines and tracks it, includes loans made by way of home equity lines of credit and home equity loans. And as the Fed also reports in the latest Flow of Funds, home equity loans have been on the march, rising to by 18% for the year through this year’s first quarter. Overall, the $1 trillion-plus of home equity loans in the first quarter has roughly doubled since 2001.
And what is Joe doing with all that borrowed money? In theory, he might be plowing it back into appreciating assets, although the sales figures at the likes at various retailers suggest otherwise. Indeed, buying ever larger homes compels homeowners to furnish them. It’s a vicious, albeit retailer-friendly circle.
In any case, it’s a safe bet that the weakness for dipping into one’s home equity has blossomed thanks to the convergence of two trends–trends that are themselves not unrelated, namely, cheap money and rapidly appreciating home values. But as recent events have detailed, those trends aren’t quite what they used to be, and may stumble more in the months and years ahead. The question then necessarily becomes: what does that imply for Joe’s spending and borrowing habits, and economic growth?
To be sure, the answer will have no immediate affect on today, tomorrow or next week. Secular trends are slow-moving animals, and too are transitions in such. Nonetheless, embracing the strategic has its merits, even if it’s not immediately obvious in the here and now.