Earlier this week, I posted a story called Time Magazine is worse than you think, not inflation that critiqued an article in Time Magazine about inflation. The author of the article does not seem to understand why consumer debt has gone up, even while interest rates have gone down.

This is a classic example of supply and demand. The interest rate that lenders charge on loans can be thought of as the price of money. It represents the amount of money you have to pay in order to get access to cash for a period of time. If you have studied economics (or, if you just apply some common sense) you will know that as the price of a good decreases, the quantity of the good demanded by consumers increases. In other words, when Macy's runs a sale on underwear, I buy more underwear.

With that piece of information, what should happen to consumer debt when the cost of incurring that debt declines?

The answer is this: the quantity demanded will increase. In other words, classical economic theory predicts that consumer debt will increase as the cost of that debt decreases, which is exactly what happened.