Interesting article from the Washington Post on the growth of personal debt over the past 60 years.

The good news is that all this bolstered the economy. At year-end 1999, household debt (including mortgages) totaled $6.5 trillion, 96 percent of disposable income; by March 2003, debt had jumped to almost $8.7 trillion, 108 percent of income. The extra $2 trillion, including money from "cash out" mortgage refinancings, stimulated shopping. Even better, falling interest rates meant that monthly interest and principal payments actually declined slightly, from a peak of 14.4 percent of after-tax income in 2001 to 14 percent now. People refinanced mortgages, switched high-rate credit-card debt into lower-rate mortgage debt or borrowed for less. Since 1998, average credit-card rates have dropped from 15.6 percent to 12.8 percent; rates on new auto loans have slipped from 6.3 percent to 3 percent.

The bad news is that all the good news won't last forever. Spending demographics will deteriorate slightly in the next decade, says Sterne. Younger households -- relatively poorer -- will grow rapidly. An aging baby boom will slowly lose purchasing power. The larger and iffier issue involves the inevitable, though undetermined, end of America's 60-year credit binge. Interest rates have risen from recent lows, and greater threats loom.

Household debt can't permanently grow faster than household income, though it has for decades. Sooner or later families will decide they've borrowed enough, or too much. Sooner or later baby boomers will pay down lifetime debts. Sooner or later lenders will exhaust good credit risks. Indeed, whether the aggressive lending of recent years has gone too far remains unsettled. Higher delinquency and personal bankruptcy rates are causes for concern.

Consumer spending amounts to 2/3rds of the US economy according to many articles I've read. What happens when large numbers of people have to cut back on their spending, such as when the Baby Boomers begin to retire in large numbers a few years from now?

On a personal note, my wife and I will pay off our mortgage next week, making us 100% debt free at least for the foreseeable future. We made the decision to pay off our mortgage very aggressively last year. Sure, we'll lose the mortgage deduction and end up paying even more in income taxes, but the important thing is what's left over. Deductions only lower your taxes at the marginal rate, so for someone in a 30% tax bracket, $10,000 of deductions only lowers taxes by $3000. Frankly, I'd rather keep the $7000 than pay it to the mortgage company, but that's a personal decision.