From June 2008 to June 2010 total household debt in the United States decreased by about $610 billion. As of June 30, 2010 the balance of outstanding consumer credit stood at approximately $12.6 trillion dollars according to the Federal Reserve’s Z.1 Flow of Funds Accounts report. The Real Time Economics blog at the Wall Street Journal took a closer look at this $610 billion decline to better understand how this it was achieved.
“There are two ways, though, that the debts can decline: People can pay off existing loans, or they can renege on the loans, forcing the lender to charge them off. As it happens, the latter accounted for almost all the decline. Our own analysis of data from the Fed and the Federal Deposit Insurance Corp. suggests that over the two years ending June 2010, banks and other lenders charged off a total of about $588 billion in mortgage and consumer loans.
That means consumers managed to shave off only $22 billion in debt through the kind of belt-tightening we typically envision. In other words, in the absence of defaults, they would have achieved an annualized decline of only 0.08%.”