Many historians believe that this combination of growing personal debt and a widening wealth gap destabilized the economy and precipitated the Great Depression. A similar fault line underlies today's economy.
While the media trumpets rising economic growth and soaring Dow Jones, signs are emerging that the current boom, like that of the 1920s, is founded on vast inequities of wealth and is financed by growing consumer debt.
(...) Behind the wealth gap lurks the wage gap, the fact that wages have fallen short of inflation for the past two decades. Although wages rose in 1997 and 1998, real weekly earnings for average workers are still lower than they were in the 1970s. Had wages risen at the same rate as productivity, hourly workers would today earn an additional $5.33 an hour or $11,000 a year—that could be used to purchase assets.
(...) Instead, households are borrowing heavily to make up for stagnant wages. The U.S. savings rate—the percentage of personal income not spent each year—is less than zero, meaning that the typical U.S. household spends more than it earns. Debt service now eats up 17% of consumer income, a heavy and potentially insupportable burden. As a result, nearly one in five households has negative net worth, and bankruptcy filings have doubled since 1990.
Consumer advocates also worry about the large numbers of homeowners taking out home-equity loans on the basis of what may be speculative increases in their homes' value. In an economic downturn, with a rise in unemployment, home prices could drop precipitously, putting more middle-class households into bankruptcy and sparking a wave of home foreclosures."
Source: Chuck Collins, Dollar & Sense, 1999 Archive