The recovery that seemed so robust at the beginning of the year is not as deep as it seemed. The 2012 Annual Report released late last week by the Federal Reserve of St. Louis indicates that Americans have yet to recover more than 55% of their pre-recession wealth.  

     Earlier this year, the Fed indicated that on the whole Americans had recovered more than 91% of their losses but this figure was based on aggregate household-net-worth data. This earlier data does not take into account such things as inflation, population growth and changes to the marketplace, which occurred during the past six years.

     The St. Louis Fed report says that approximately two-thirds of the increase in aggregate household wealth is due in large part to rising stock prices. This has primarily benefitted the richest households with 80% of the stock held by 10% of the population. The rest of us are still digging out.

     Unlike the wealthiest Americans, who have diversified portfolios, which spread their wealth across many investment options, typical middle and lower-income Americans have most of their investment dollars in real estate - usually their personal home. This investment sector was the hardest hit in the recession and has still not returned to pre-recession levels - if it ever will.

     High debt levels and the problems this causes in rebuilding net worth are key reasons for the slow recovery. The people who were hit hardest were those who suffered job losses or reduced income. Unfortunately, at the same time, they were also the ones who had higher debt loads from having borrowed cheaply to buy houses well beyond what they could afford. Most affected were young people, African-Americans and Hispanics - all who have low savings and high debt, with most of their wealth based on housing.

To Pay or Not to Pay ...

     The St. Louis Fed report called into question whether it is prudent for the economy overall for people to pay down debt - deleveraging - in financial terms. 

     Since the beginning of the recession, the mantra of the Fed is that we can somehow spend our way out of debt.

     Accordingly, by paying down our debt (instead of continuing to spend) we are causing the economy to recover less quickly, and so therefore, we should just simply keep spending.

     Somehow, this seems counter-intuitive, and in light of the principles of Self-Empowered Banking - it's just plain crazy. You cannot spend your way out of debt unless you are planning to go through a bankruptcy to clear your debt, a choice which we do not advocate. 

   Better still, the prudent action is to take more control over how you manage and use your money before bankruptcy is your only option. Someone will always be performing the banking and financing functions with your money, and it might as well be YOU!

     Here is some thought-provoling information based on what Americans think they can do about their debt from a survey by CreditDonkey.com: 

• 50% of Americans will pay down their debt in 5 years or less
• 10% of Americans think it will take more than 20 years to pay down their debt (It will if they keep spending!)

     How are people planning to get out of debt?

• 79% will budget their way out of debt
• 52% will increase their income with a second job
• 13% will declare bankruptcy

     For those who attended any of the Your Financial Destiny sessions - you may remember that Dr. Robert Murphy explained very clearly that the economy is fueled by savings, not by constant debt creation. And, that calls for a different method of handling your money.  

To Pay or Not to Pay Down Your Debt - That is the Question?

    So, if you're wondering whether you should pay down your debt or join the Fed in jump-starting the economy by continuing to spend at pre-recession levels - the answer is PAY DOWN YOUR DEBT as quickly as you can, and then save your money. 

   Did you know you can do both (save and reduce debt) at the same time? And, did you also know, even if you have have no cash flow due to your debt, if you have income there's a way to redirect your dollars to save and reduce debt?

     If you're lucky enough to have a Self-Empowered Banking system - the next time you need to finance something you want - you'll have the money and the system in place to finance the debt and capture the interest you would have paid the credit card company, the bank, or the loan shark. 

     Oh, you'll also be helping to jump-start the economy with your purchases, you just won't have to be subject to the whims of the financial marketplace.