Causes of Household Indebtedness in Germany and Australia

1. Introduction

Throughout history, debt has been a pervasive aspect of human societies, shaping economies and
influencing social structures. From ancient civilizations to modern nations, the concept of
indebtedness has played a crucial role in economic systems and societal dynamics. According to
David Graeber's book "Debt: The First 5,000 Years," debt has been a fundamental element in human
interactions, serving as a means of exchange, a tool of power, and a source of social and economic
relationships (Graeber, 2011). Indebtedness refers to the financial state wherein individuals or
families owe money to lenders, typically due to mortgages, loans, credit card debt, or other
financial obligations. This phenomenon is influenced by a complex interplay of socio-economic
factors, including macroeconomic conditions. The global rise in household debt levels following the
2007 financial crisis has become a cause for concern worldwide. The objective of this research is
to bridge these gaps by undertaking a comprehensive investigation into the social and economic
factors influencing household indebtedness in Germany and Australia. By addressing this research
gap, we hope to contribute to a deeper understanding of this critical issue and provide valuable
insights for policymakers and individuals alike.



2. Literature review


Indebtedness was very sensitive issue which was triggered by many simple factors that was difficult
to realize by policymakers. One of those factors was financial innovation which was  mentioned by
Dynan (2007), he highlights the role of financial innovation in expanding access to credit and
facilitating the accumulation of debt, particularly in the mortgage market in US. Expanding access
to credit made it easier for households to get mortgages. Furthermore, the Dynan (2007) explores
the consequences of high levels of household debt, focusing on the impact on consumption, financial
stability, and economic growth. Author discusses the potential risks associated with increased
household indebtedness, such as vulnerability to economic shocks, reduced consumer spending, and
the amplification of financial instability. The paper emphasizes the need for policymakers to
address the challenges posed by rising household debt and suggests potential policy measures to
promote responsible borrowing, improve financial literacy, and enhance consumer protection. It also
calls for further research to deepen the understanding of the complex dynamics between household
debt, economic behavior, and systemic risks. In summary, Dynan's paper provides a comprehensive
analysis of the causes and consequences of the increase in U.S. household indebtedness. It
highlights the importance of addressing this issue to safeguard financial stability and underscores
the need for informed policy interventions and continued research in this area.

Following this, we can see positive effect of social policies in regard to indebtedness. Study by
Bernheim et al. (2001) uses data from the U.S. Survey of Consumer Finances, the study finds a
positive correlation between education and saving behavior. Individuals with higher levels of
education tend to save more, accumulate greater wealth, and exhibit a higher likelihood of holding
financial assets. The authors also explore potential mechanisms through which education influences
saving behavior. They suggest that education enhances individuals' financial literacy, improves
their ability to make informed financial decisions, and increases their awareness of long-term
financial goals. Furthermore, the study examines the impact of educational policies and programs on
savings behavior. It suggests that policies aimed at promoting access to education and improving
the quality of education can indirectly contribute to higher levels of saving and financial
well-being. Overall, the paper underscores the importance of education in fostering saving behavior
and highlights the potential benefits of educational initiatives in promoting financial security
and wealth accumulation among individuals and households.

These findings shed light on main determinants of indebtedness across the world. Among G20 nations
Germany had a relatively low household debt-to-income ratio compared to some other large economies.
In Germany, several studies have examined the levels and determinants of household debt. Lusardi et
al. (2014) discuss the potential mechanisms through which financial literacy impacts economic
outcomes, including improved understanding of financial products, increased confidence in financial
decision-making, and enhanced ability to navigate complex financial markets. Furthermore, the paper
emphasizes the societal benefits of financial literacy, such as reduced reliance on public
assistance programs, increased financial stability, and improved overall economic well-being. Based
on their analysis, the authors suggest that promoting financial literacy through education and
targeted interventions can have substantial economic implications, leading to better financial
outcomes for individuals, households, and the economy.

However, household debt was equivalent to around 1.86 times the annual disposable income in
Australia according to Australis Bureau of Statistics (2020). It has also been the subject of
extensive research by many scholars. Lars E.O. Svensson (2022) examines the impact of household
debt on consumer spending during the financial crisis in Australia. The author challenges the
conventional belief that high levels of household debt led to a significant decline in consumer
spending during the crisis. Through a comprehensive analysis of household-level data, Svensson
argues that the notion of a "debt overhang" effect, where high levels of debt constrain consumer
spending, is not supported by the empirical evidence in the Australian context. Instead, he
suggests that factors such as income shocks and changes in expectations had a more substantial
influence on consumer spending behavior during the crisis. The paper emphasizes the need for a
nuanced understanding of the relationship between household debt and consumer spending, cautioning
against overgeneralizations and highlighting the importance of considering other contextual
factors. The findings contribute to the ongoing debate on the role of household debt in shaping
economic dynamics and challenge the commonly held belief regarding its impact on consumer spending
during times of financial crises.








3. Conclusion


In conclusion, this comprehensive literature review has explored the multifaceted nature of
household indebtedness and its wide-ranging implications for individuals, households, and
economies. The reviewed studies have illuminated several key factors that influence household debt,
including economic variables, demographic factors, financial market characteristics, and education.
Furthermore, this review challenges conventional beliefs regarding the impact of household debt on
consumer spending during financial crises. The findings suggest that factors such as income shocks
and changes in expectations have a more substantial influence on consumer spending behavior than
the level of household debt itself. These insights caution against overgeneralizations and
emphasize the need for a nuanced understanding of the relationship between household debt and
consumer spending dynamics during times of economic downturns. By addressing the research gaps
identified in this review, future studies can contribute to a deeper understanding of this critical
issue and inform evidence-based policy-making and interventions that promote financial stability
and well-being for individuals, households, and economies as a whole.


4. Bibliography:

Bernheim, B. Douglas., Garrett, D. M., & Maki, D. M. (2001). Education and saving: Journal of
Public Economics, 80(3), 435–465. https://doi.org/10.1016/s0047-2727(00)00120-1


Dynan, K. E., & Kohn, D. L. (2007). The Rise in U.S. Household Indebtedness: Causes and
Consequences. SSRN Electronic Journal. https://doi.org/10.2139/ssrn.1019052


Graeber, D. (2012). Debt: The First 5,000 Years. In Amazon (Reprint edition). Melville House.
https://www.amazon.com/Debt-First-5-000-Years/dp/1612191290


Lusardi, A., & Mitchell, O. S. (2014). The Economic Importance of Financial Literacy: Theory and
Evidence. Journal of Economic Literature, 52(1), 5–44. https://doi.org/10.1257/jel.52.1.5


Svensson, L. G. (2021). Household Debt Overhang Did Hardly Cause a Larger Spending Fall during the
Financial Crisis in Australia. National Bureau of Economic Research. https://doi.org/10.3386/w28776


Household debt | Household finances. (n.d.). Housing Data.
https://www.housingdata.gov.au/visualisation/household-finances/household-debt



Assets, debts. (n.d.). Federal Statistical Office. Retrieved June 22, 2023, from
https://www.destatis.de/EN/Themes/Society-Environment/Income-Consumption-Living-Conditions/Assets-D
ebts/_node.html