(NEW YORK) -- While politicians in Washington stumble toward the fiscal cliff, American households have really cleaned up their act.
According to the Federal Reserve, one key measurement of household debt in the third quarter plunged to its lowest level in 29 years. The share of loan payments to disposable personal income fell to 10.61 percent.
This means that if the economy improves, many consumers may have more money to spend. But right now, that remains a big "if."
Unless there’s a deal, the fiscal cliff could do real damage to the economy. The first and best-known effect would be sweeping tax hikes.
“By jacking up taxes on so many taxpayers it will squeeze purchasing power,” says Greg Ip, U.S. economics editor of The Economist magazine.
Many consumers and businesses would cut back on spending.
“They just decide to pull back, not to spend, not to buy that house, not to initiate that new business venture and that would multiply the negative impact,” Ip says.
The third effect would come from sharp and sudden government spending cuts.
“You’ll see layoffs in the defense industry, layoffs in any industry that does business with the federal government as federal spending is cut back sharply,” says Ip.
Copyright 2012 ABC News Radio