Saturday, May 19, 2007

Easy as Pie

Apropos my last post, a front page story in today's New York Times describes a couple's struggle with debt and, more broadly, America's growing love affair with indebtedness.

The couple, the Moellerings, owe $22,228 in credit card debt. The article shows that they've made some pretty bad choices, including 50K of expenditures that they accumulated over a seven month span for a wedding, honeymoon and bathroom renovation. Yet, there is evidence of abusive loan practices as well, including a 32.24 percent interest rate on their Sears credit card. The word usurious might even be thought to apply.

The Moellerings are representative of a major shift in behavior that has taken place over the past twenty-five years. Personal savings rates ranged between 8-12 percent of disposable income through the 1970s until the early 1980s, according to a graph that accompanied the article. Starting from a high of nearly 12% in the early 1980s ("morning in America"), personal savings dropped continuously until 2005 dipping into the negative. Americans now spend more than their income.

Credit has become easy, and our addiction to buying whatever we wish has deepened and widened. According to the article, "Just a generation ago, financial profiles like the Moellerings’ would have been unusual. But changes in federal regulations since the 1980s, along with consolidation in the banking industry and changed consumer attitudes toward borrowing and saving, have made credit more widespread, more heavily marketed and more confusing, with offers of more credit — at low rates — extending to even the least reliable risk. In 2006, the industry mailed out nearly 8 billion credit card offers, up from 3.5 billion in 2000.

"Credit card debt, less than $8 billion in 1968 (in current dollars), now exceeds $880 billion, more than tripling since 1988, adjusting for inflation, according to the Federal Reserve Bank. Penalty fees alone cost consumers $17.1 billion in 2006 — up from $12.8 billion in 2003, adjusted for inflation, according to R. K. Hammer, a bank card advisory firm. In part because of the debt burden, the consumer savings rate fell below zero percent in 2005 and has stayed there."

At a time when the nation was purportedly becoming more wealthy - witness the rise in real estate value over that period - we have been collectively spending more than we make. Funny thing is - that purported "wealth" has been juiced up precisely by just such easy credit. When the bills come due - when we've reached the end of the Ponzi scheme, as seems to be the case with the collapse of the "sup-prime market" - we'll see just how much our "wealth" is worth. Just as the nation has spent beyond its means - selling huge sums of bond debt to nations like Japan and China - the average consumer has rung up enormous quantities of debt, often spending beyond their means to purchase goods made in those same nations. A collective transfer of wealth has marked the past 25 years, and the next generation will be saddled with the cost of our spending spree. Has there ever been a more irresponsible or self-indulgent generation than ours? The bumper sticker one sees occasionally - "I'm spending my children's inheritance" - is more true than we know.

It's difficult to imagine that we will save or "grow" our way out of this predicament. The impending costs of diminishing energy resources will only accelerate our indebtedness and loss of patrimony. At a time when we might have been preparing for a future of limits - one that Jimmy Carter warned us of in his 1979 speech - we pulled out the credit cards and printed more dollars. We lulled ourselves into a fantasy that growth would be infinite.

All this, in the name of freedom. Two credit card commercials come to mind. The first, for the "Chase Freedom" card, portrays all the goodies that anyone would like to buy with background music from the Rolling Stones, "I'm free to do what I want, any old time..." The other shows the snowboarder Shawn White jetting across the globe at the slightest rumor of a snow storm. It closes with him saying, "I need to be able to travel where I want, when I want." You should emulate him and charge spur of the moment trips to your credit card. Don't worry about when the bill will come due - live in "the now." For a nation that is sometimes said to live in the future, there is actually very little thought toward the actual future. We are temporally blinkered, living in the present without concern for the consequences for future generations. So long as I'm free to do what I want, any old time....

Interesting article here - better financial minds better than mine argue that the financial system is due for a rather severe fall. Would our generation have the same communal and local resources to respond to another Depression?