A debt culture gone awry

[The Grim Squeaker]

The U.S. economy, once the envy of the world, is now viewed across the globe with suspicion.
America has become shackled by an immovable mountain of debt that endangers its prosperity and threatens to bring the rest of the world economy crashing down with it.

The ongoing sub-prime mortgage crisis, a result of irresponsible lending policies designed to generate commissions for unscrupulous brokers, presages far deeper problems in a U.S. economy that is beginning to resemble a giant smoke-and-mirrors Ponzi scheme. And this has not been lost on the rest of the world.

This new reality has had unfortunate side effects that go beyond economics. As a banker working in the heart of the Muslim world, I have been amazed by the depth and breadth of anti-Americanism, even among U.S. allies, manifested in reactions ranging from fierce anger to stoic fatalism. Muslims outside the United States interpret America's policies in the Middle East not as an effort to spread democracy but as a blatant neocolonialist attempt to solve its economic problems by force. Arabs and Persians alike argue that America's fiscal irresponsibility has forced the nation to seek solutions through military aggression.

Many believe that America's misguided adventure in Iraq was a desperate attempt to capture both a reliable source of cheap oil and a major export market for the United States.

The United States borrows a whopping $2.5 billion daily from abroad to service its burgeoning debt. In order to continue borrowing at reasonable interest rates America needs to retain credibility with its overseas creditors, especially Far Eastern nations running huge trade surpluses. A cessation of foreign lending would force the Fed to raise interest rates to attract money, precipitating a collapse of the already weak housing market and pushing the economy into recession.

This is why the Chinese, in particular, have threatened to retaliate against proposed U.S. trade sanctions by reducing their $1.3 trillion in dollar holdings.

The U.S. debt situation is so grave that the Chinese would not even need to "dump dollars" to precipitate a meltdown but could simply refuse to extend further credit: They could cease purchasing additional Treasury Bonds and Treasury Bills, without selling any excess inventory. China has the far stronger hand, because a run on the dollar would merely reduce China's gigantic cash surplus while increasing America's debt burden to astronomical levels.

U.S. debt affects all nations, but in surprisingly different ways: Third world farmers suffer from the effects of gigantic U.S. farm subsidies aimed at reducing the trade deficit, while Russia has actually profited from America's lack of discipline.

Flush with funds generated from a decade of trade and account surpluses, Russia views U.S. sensitivity to its expansionist energy policy as a response to America's own failure to reduce energy waste and exploit alternative energy sources when it had the opportunity to do so. In sum, American economic decadence has become a source of Russian strength.

America's supply-side economists argue that there is nothing wrong with going into debt, but this is valid only as long as a nation and its consumers are gaining something in return.

What have Americans gained from their nation's mountain of debt? A crumbling infrastructure, a manufacturing base that has declined 60 percent since World War II, a rise in the wealth gap, the lowest consumer-savings rate since the depths of the Great Depression, 50 million Americans without health insurance, an educational system in decline and a shrinking dollar that makes foreign travel a luxury.

The best cars, the best bridges and highways, the fastest trains and the tallest buildings are all to be found outside America's borders. Supply-siders ignore the crucial distinction between, on the one hand, debt employed as an investment vehicle to enhance competitiveness and, on the other, debt used to pay off current expenses and to create even more debt.

The bottom line is that America is awash in red ink and seeks the wrong solutions to its debt problems
. A return to fiscal responsibility would make America far stronger, both domestically and internationally, than would a continuation of current policies that falsely project strength through idle protectionist threats and failed military aggression.

Current tensions between the United States and the rest of the world will continue as long as America's military bark is louder than its economic bite.

A solution to the U.S. debt problem requires radical measures, including:
the elimination of corporate tax loopholes, a reversal of tax breaks for the ultra-rich, a bipartisan campaign to eliminate budget "pork," imposition of stringent limits on corporate debt and speculative lending, a vast reduction in military expenditure and, finally, an additional 50 cent per gallon gasoline tax that would slash the federal deficit, curtail energy waste and spur technological breakthroughs.

Let us hope America heeds the warnings, dispenses with junk-food economics and embraces a crucial diet of fiscal discipline. It remains to be seen, however, whether America's political leaders have the courage to instigate such reforms, and whether Congress is finally willing to do something for the future of ordinary, hard-working Americans.

Excellent article, it even has sensible answers for cutting down on expenditures (I was afraid that it was going to mention "Tariffs, import taxes and less trade, forward Mercantilism" but these are sensible, feasible (Save in the military) proposals (If absurdly optimistic in terms of the chances of them happening before it's too late, and the requirement of ethical party neutral leadership [Pork cutting])

[Stuart Mackey]

I dont see that fiscal responsibility will happen in the US, too many people in powerfull positions with something to lose and a system of government that seems to almost encourage it.

[Dahak]

It might only be the "small scale" here, but there have been a number of reportages in news papers and magazines in the wake of the mortage-crisis about the "normal" US-American and their attitude towards taking and using credits.
I was a bit shocked by the way it seems to be almost normal to take huge credits. And, from several persons interviewed, I got the impression that they simply based this on some belief that their houses will continue to become worth more and more. Germany might be an extreme case for the other side (I think...) but here there is more emphasis on saving your money than to spend it or get credits.
Why are Americans considering using credits this lightly or is this just a bit of a wrong impression I got?

[Darth Wong]

Why are Americans considering using credits this lightly or is this just a bit of a wrong impression I got?

I'm not so sure that they view credit so lightly, but the real problem is they feel they need to compete with each other on the basis of their lifestyles. Everyone has to have two cars, and they should both look shiny and new. Everyone has to take an expensive vacation every year. Retailers actually tell them how to much to spend on certain things, like engagement rings (the "two months salary" rule, which is the most preposterous thing I've ever heard). Weddings have become contests in which you show off how much you earn by wasting tens of thousands of dollars on a lavish ceremony. Any house below 2000 square feet is seen as totally unacceptable. Any house above 2000 square feet is only acceptable with a hundred thousand dollars of stylish renovations. It's been estimated that at present, one third of all the junk going into American landfills is home renovation garbage.

In short, everyone in America is trying to live an upper-class lifestyle, even if they only make middle-class wages. The American Dream has transformed from a modest "chicken in every pot" to an unsustainably grandiose "two SUVs in every driveway and a 3000 square foot house for every family".

[The Grim Squeaker]

Why are Americans considering using credits this lightly or is this just a bit of a wrong impression I got?

From what I understand it's part of the strong consumer culture. "Buy in only 56 low interest payments" wasn't coined for the plasma tv, but in the past century [Prior to the great depression in fact] .
(I've actually heard one theory for the great depression that goes along the lines of the massive amount of multi-year payment plans that resulted in such massive debt per customer that when the customer defaulted, left a very large amount of sellers holding a very large IOU without even any interest, with the effect cascading with the Credit card that resulted in Black friday. Hey, it's a theory ).

[Dahak]

...
In short, everyone in America is trying to live an upper-class lifestyle, even if they only make middle-class wages. The American Dream has transformed from a modest "chicken in every pot" to an unsustainably grandiose "two SUVs in every driveway and a 3000 square foot house for every family".

It might be extremely stupid to ask...but: isn't there common sense stopping people from doing so?
I wouldn't personally mind owning my own flat or expensive high-tech gadgets, but when I look at my income I plainly see that it requires some saving and working...

[Alferd Packer]

Well, like Dahak said, as long as your house keeps going up in value, it makes sense. Taking my town as an example, the average home price in 2000 was around $150,000. In 2006 it was just over $300,000. If you bought a house in 2000, you've essentially made $150,000 without lifting a finger. You don't need to be fiscally responsible, because you can always borrow against that insanely high amount of equity in your house, or, if worse comes to worse, sell it and make a profit large enough to cover your debts.

Of course, if the market starts taking a shit (as it is), that assumption no longer holds. Without that equity, there's nothing to borrow against. And with loans becoming harder to secure, you can't expect your home to sell in short order. In the mean time, you have mounting credit card bills, rising property taxes, those home equity loans which you already took, and, of course, that pesky mortgage payment. You're either going to wind up just scraping by or staring foreclosure in the face. Not a great prospect, but that's why I live beneath my means.

[Einhander Sn0m4n]

I believe the dirty little secret of American-style capitalism is that the economy must grow exponentially or it will implode. It's basically the world's biggest Pyramid Scam.

[Darth Wong]

Well, like Dahak said, as long as your house keeps going up in value, it makes sense. Taking my town as an example, the average home price in 2000 was around $150,000. In 2006 it was just over $300,000. If you bought a house in 2000, you've essentially made $150,000 without lifting a finger. You don't need to be fiscally responsible, because you can always borrow against that insanely high amount of equity in your house, or, if worse comes to worse, sell it and make a profit large enough to cover your debts.

Of course, if the market starts taking a shit (as it is), that assumption no longer holds. Without that equity, there's nothing to borrow against. And with loans becoming harder to secure, you can't expect your home to sell in short order. In the mean time, you have mounting credit card bills, rising property taxes, those home equity loans which you already took, and, of course, that pesky mortgage payment. You're either going to wind up just scraping by or staring foreclosure in the face. Not a great prospect, but that's why I live beneath my means.

The problem with the idea of relying heavily on growth in home equity is not just the potential for a real-estate market collapse. It's the fact that you actually need to live in your home. Therefore, the idea of losing it to debt foreclosure or selling it to cover expenses is not really palatable, and if you crystallize your imaginary profits by selling the house, you haven't really gotten ahead because you are now forced to buy another house in the same overheated real-estate market, which will probably cost as much or more as the one you just sold. So people think "I'm getting rich!" because of their home equity, but it's a false kind of wealth that can't actually be used for anything except driving yourself deep into debt.

The only responsible way to use home equity for personal wealth building is to either use the loan to make money (eg- as startup capital for a business) or when you get older, and you sell a larger house to retire to a smaller one. The idea of people using it to secure lifestyle loans makes very little sense; the equity may get you the loan but does absolutely nothing to help pay it off. Even if the house massively appreciates in value, that still doesn't help you pay it off; it only helps you get more loans.

[Alferd Packer]

The problem with the idea of relying heavily on growth in home equity is not just the potential for a real-estate market collapse. It's the fact that you actually need to live in your home. Therefore, the idea of losing it to debt foreclosure or selling it to cover expenses is not really palatable, and if you crystallize your imaginary profits by selling the house, you haven't really gotten ahead because you are now forced to buy another house in the same overheated real-estate market, which will probably cost as much or more as the one you just sold. So people think "I'm getting rich!" because of their home equity, but it's a false kind of wealth that can't actually be used for anything except driving yourself deep into debt.

To this point I would definitely agree, but with a caveat. In certain circumstances, if you sell your home and move to a cheaper market, you can make money. Of course, this is easier said than done, but it is possible. In my case, I could move to the South or the Midwest, have a significantly cheaper cost of living, but still demand the same salary I get paid working in the super-expensive NYC metro area(not that I would ever move to such hellholes, I'm just saying that I could). Of course, if I wanted to stay in the same area, then you'd be quite correct; I'd be pissing into the wind, and I'd be saddled with those extra home equity loans from my first house. And I'm fortunate in that I live in a very expensive area of the country, as salaries are accordingly higher. For someone living in St. Louis or Oklahoma City, you can't really live anywhere significantly cheaper and have access to the same kind of employment.

[Stuart Mackey]

I believe the dirty little secret of American-style capitalism is that the economy must grow exponentially or it will implode. It's basically the world's biggest Pyramid Scam.

The technical term is bubble, and bubbles go pop. This is why I live within my income and only buy something when I have the hard cash to do so. Its also worth pointing out that when I puchased my home in 2000, I did so after assertaining that yes, if interest rates do go up, I will be able to afford it and budgeted accordingly. Well, NZ interest rates are at 8.5 at the Reserve Bank, one of the highest in the world, and I can still afford it.
Saving money and being patient for what one wants dont seem to be much in vogue these days, still, people get punished for that sooner or later.

[Simplicius]

It might be extremely stupid to ask...but: isn't there common sense stopping people from doing so?
I wouldn't personally mind owning my own flat or expensive high-tech gadgets, but when I look at my income I plainly see that it requires some saving and working...

In some cases, yes - there are those of us who live modestly and give credit a wide berth. But in general, the US is awash in consumerism. It was the postwar boom that made the American Dream so absurdly materialist, as most people had a lot of money saved up because of austerity measures, and because industry which had expanded to build tanks, planes, ships, and shells was facing a slide back to pre-war conditions if that growth wasn't successfully converted to peacetime production. That high wealth and high production brought about the prefab suburban house, the ubiquitous automobile, the avocado-colored refrigerators, and all of that keeping up with the Joneses that Darth Wong mentioned. All of this consumption was well and good when the prosperity was there to spend, but economic growth has a nasty way of evaporating if money isn't pumped into it - so, as American turned their hard wealth into lawnmowers and television sets, something had to fill the void, namely, credit. What used to be a means of easing business along became a crutch for the economy.

The problem, or part of it, is that credit is as much a business as any other, so we are bombarded with advertising for credit. You might hear 'lighter side' news items about dead people getting credit card offers, children getting them, pets, etc. At the same time, Americans aren't necessarily very well educated about money, managing their accounts, bookkeeping, and so on, and also they've got fifty some-odd years of "If you want it, you can get it" egging them on. It is not an environment conducive to common sense, sad to say.

[Fingolfin_Noldor]

Is there any statistic as to how much US Treasury bonds have been bought and buy whom and the total value of the bonds purchased?

[tim31]

The problem with the idea of relying heavily on growth in home equity is not just the potential for a real-estate market collapse. It's the fact that you actually need to live in your home. Therefore, the idea of losing it to debt foreclosure or selling it to cover expenses is not really palatable, and if you crystallize your imaginary profits by selling the house, you haven't really gotten ahead because you are now forced to buy another house in the same overheated real-estate market, which will probably cost as much or more as the one you just sold. So people think "I'm getting rich!" because of their home equity, but it's a false kind of wealth that can't actually be used for anything except driving yourself deep into debt.

See, I used to think about this a lot when I was in early high school, so why can't half of the first world get this into their heads? The only way anyone will ever profit from an inflating market is to have the capital to take advantage of it in the first place; or else the old 'wait for the parents to die and sell off the farm' routine, which is sadly still abundant. Hell, Emily's mother's family are fighting over her grandparents assets, and they're still alive.

[LadyTevar]

Another reason that American purchase so much on credit: Lack of actual money in the paycheck.

I'm willing to bet that the majority of credit card debt is from lower to middle-class income families, trying to cover hospital bills, car payments, furniture purchases, and other 'quality of life' bills that their meager paycheck cannot purchase in cash.

And thus starts the vicious cycle where the small paycheck is forced to stretch to cover more and more credit debt, until there is honestly no more money in that paycheck to cover all the bills.

[Flagg]

Why are Americans considering using credits this lightly or is this just a bit of a wrong impression I got?

I'm not so sure that they view credit so lightly, but the real problem is they feel they need to compete with each other on the basis of their lifestyles. Everyone has to have two cars, and they should both look shiny and new. Everyone has to take an expensive vacation every year. Retailers actually tell them how to much to spend on certain things, like engagement rings (the "two months salary" rule, which is the most preposterous thing I've ever heard). Weddings have become contests in which you show off how much you earn by wasting tens of thousands of dollars on a lavish ceremony. Any house below 2000 square feet is seen as totally unacceptable. Any house above 2000 square feet is only acceptable with a hundred thousand dollars of stylish renovations. It's been estimated that at present, one third of all the junk going into American landfills is home renovation garbage.

In short, everyone in America is trying to live an upper-class lifestyle, even if they only make middle-class wages. The American Dream has transformed from a modest "chicken in every pot" to an unsustainably grandiose "two SUVs in every driveway and a 3000 square foot house for every family".

There is alot of that going on, but the number one reason for bankruptcies is still medical bills IIRC. Even if you have pretty comprehensive insurance, that shit still stacks up like crazy

[Ma Deuce]

I was afraid that it was going to mention "Tariffs, import taxes and less trade, forward Mercantilism"

What's wrong with tariffs and import taxes? See, I find it interesting that most of America's overseas trading partners (China, Japan, Europe, Korea etc.) have protectionist trade tariffs placed upon various imports, yet America's tariffs are comparatively quite minimal, like they're deliberately allowing themselves to be preyed upon economically just to satiate their debt-driven consumerist appetites.

[Vendetta]

Another reason that American purchase so much on credit: Lack of actual money in the paycheck.

I'm willing to bet that the majority of credit card debt is from lower to middle-class income families, trying to cover hospital bills, car payments, furniture purchases, and other 'quality of life' bills that their meager paycheck cannot purchase in cash.

One third of Americans have financial problems directly caused by medical costs. I recall seeing somewhere that medical costs are the largest cause of personal bankruptcy in America today.

[Einhander Sn0m4n]

Another reason that American purchase so much on credit: Lack of actual money in the paycheck.

I'm willing to bet that the majority of credit card debt is from lower to middle-class income families, trying to cover hospital bills, car payments, furniture purchases, and other 'quality of life' bills that their meager paycheck cannot purchase in cash.

One third of Americans have financial problems directly caused by medical costs. I recall seeing somewhere that medical costs are the largest cause of personal bankruptcy in America today.

Oligarchy and greed all coming home to roost, IMO. If people were given a proper living wage, this wouldn't have happened, OR, if it had to, the shock would be so much weaker and more easily dealt with.

Wealth, like loyalty, is like a yo-yo. It must be sent down before it will come back up.

[CaptainChewbacca]

I think part of it is a lack of credit education. I got a card when I was eighteen, and my parents made sure I understood that credit <> money and that I needed to try and pay off the balance as quickly as possible. Now I'm 25 with a $10k credit limit and a near-perfect credit rating.

Gotta get them when they're young.

[Skylon]

In short, everyone in America is trying to live an upper-class lifestyle, even if they only make middle-class wages. The American Dream has transformed from a modest "chicken in every pot" to an unsustainably grandiose "two SUVs in every driveway and a 3000 square foot house for every family".

I dunno if this is a result of upbringing, but that is the sense I've been getting since the late 90's in America is that consumerism has gone into some kind of insane overdrive. Everything seems disposable, and what you have is seen as such a defining standard of who you are it is insane. It's like kids who grew up never learning that no, you can't have everything the rich kid in class has, because you cannot afford it.

And God forbid anyone had savings.

[Flagg]

And God forbid anyone had savings.

And that's the biggest problem, I think. It's all about instant gratification and few people seem to grasp the concept of saving a few hundred dollars every month to buy that big screen TV you've got a hard on for, rather than using a credit card and paying off the interest alone for several years. The same thing goes for things like cars. Rather than just trading in your last vehicle as a downpayment, save up some money for a few months and add a couple grand on top of the trade in when buying a new car. You can probably get a lower interest rate and your monthly payments will be a hell of alot lower.

[Starglider]

It's all about instant gratification and few people seem to grasp the concept of saving a few hundred dollars every month to buy that big screen TV you've got a hard on for, rather than using a credit card and paying off the interest alone for several years.

Well of course not, all the commercials tell them that they must have shiny crap and that credit cards are good and they can have everything they want. How can the commercials be wrong? They're on TV!

[Fingolfin_Noldor]

It's all about instant gratification and few people seem to grasp the concept of saving a few hundred dollars every month to buy that big screen TV you've got a hard on for, rather than using a credit card and paying off the interest alone for several years.

Well of course not, all the commercials tell them that they must have shiny crap and that credit cards are good and they can have everything they want. How can the commercials be wrong? They're on TV!

Not least the tonnes of spam mail that one receives offering free credit cards etc.

[Flagg]

I gleefully look forward to the day when these credit card companies start going bankrupt. Especially considering how they mercilessly go after college students all but offering them free money.