Overwhelmed by Debt? Not Necessarily(Walden)

And there certainly appear to be ample reasons to be concerned aboutboth a lack of saving and a build-up of debt. In the early 1990s,households were saving between 8 and 10 percent of their disposableincome, a rate most financial experts say is the minimum required. In2006, this saving rate was down to only 1 percent.

At the sametime, average (median) debt held per household increased almost 40percent from the early 1990s to the mid-2000s, and this is even afteradjusting for general inflation. There was also a jump in governmentdebt. Federal government debt (the so-called "national debt") perhousehold and after inflation rose 20 percent over the same period.

However,looking at saving and debt in isolation may result in some distortedconclusions. In particular, economists argue it's important to look atthe ability of a household or government to carry debt. It's also vitalto consider all types of saving.

So while the average householdincreased its debt 40 percent from the early 1990s to the mid-2000s,median household income (again after taking out inflation) rose 20percent. This makes the increase in household debt look a littlebetter, but still, the gain in debt outstripped the gain in income.

Yetbelieve it or not, the ability of the federal government to carryadditional debt looks manageable when the country's income situation isconsidered. Since the early 1990s, the amount of income earned byeveryone in the country has risen by almost exactly the same percentageas the increase in the national debt. Stated another way, the "burden"of the national debt, as a percentage of national income, is the sametoday as it was almost 20 years ago.

There's one more wrinkle to the saving/debt story.

Expertssay the best way to judge the financial position of a household orbusiness is to look at their net worth. Net worth is simply the valueof investments (also called assets) minus the value of debt (alsotermed liabilities). By this concept, someone with a large debt canstill be financially sound as long as the value of their investments issubstantially larger.

When viewed from the perspective of networth, the financial situation of U.S. households looks much different.Indeed, it looks much better.

Since the early 1990s, the networth (after inflation) of the average household has actuallyincreased, and by a healthy 40 percent. This means that while householddebt increased, the value of household investments increased even more.Also, the gain in net worth has been across the income board, with thelowest-income households achieving a 44 percent gain while thehighest-income households had a 92 percent increase.

Indeed,many economists think the gain in household net worth can explain whyour saving rate is low. Net worth can be improved in two ways: bypeople saving money out of their paycheck and putting it intoinvestments or by the investments they already own increasing in value.If one way is increasing, people often take a break from the other.

Infact, a study from the Federal Reserve found almost a one-to-onerelationship between gains in the stock market since the early 1990sand the decline in the saving rate. As the stock market has boomed - ontrend - households have let these gains bolster their net worth, andconsequently they've not been compelled to save from their paychecks.