Wednesday, May 07, 2008

Where Does the Debt Snowball Stop?

From my email inbox:
Anya, I just wanted to say I’m a big fan of your articles on yahoo finance.
You seem to be on the same page that I’ve been on since the 90’s about debt.

I’ve managed to remain debt free with the exception of a mortgage.

I think it’s insane to keep up with debt your whole life.
I wanted to get your opinion…
What is happening to our country with debt? How can this keep up?
Many American consumers riddled with debt and are keeping up with the joneses.
How does it continue to sustain and what happens to us, the people that have kept out of debt?
If, and, or when the bottom drops out and people with debt start to collapse, will they take us with them?

Hi Scott,

These are great questions.
I think that what happened to our country with debt is a complex and fascinating topic that will be discussed by historians for years. Here are some factors:

We went from a manufacturing economy to one based on marketing goods and ideas and moving money around. The financial sector got very large relative to other parts of the economy, and innovative in new ways to lend money. Consumer banking was deregulated state by state, allowing for such things as payday lending and 30% interest rate credit cards. Because of our financial power and because the dollar was until recently the global currency, a lot of other countries were willing to lend us money. Our wealth depends on growth of consumer spending, yet median incomes have barely risen in the last 30 years, so borrowing made up the difference.

Unfortunately, there will be a large cost to society from so many people having gone into more debt than they can afford. This cost can already be seen.

--The economy may go into a prolonged recession because the consumer spending that has been fueling its growth was coming from people spending beyond their means and they are no longer able to do so.
--If the victims of the housing crunch are bailed out, everyone will pay higher taxes as a result. Also, it may take a long time for housing to become affordable again. Prices were bid up by people who got mortgages they could not afford. (On the other hand, if you have good credit there are more opportunities now to buy a home in foreclosure for a good price.)
--The cost of borrowing will go up. There has been a trend of cheaper and cheaper credit, supported by the fees and penalties paid by those who are seduced into borrowing more than they can afford. If people start defaulting on their loans, creditors will raise their interest rates and become more selective about lending.
--One of the effects I'm most worried about: People who have been spending beyond their means have not been saving adequately for retirement. And the government which has been spending beyond its means is not prepared adequately to fund Social Security.

-- After all this is over, America may have to reconstitute its economy in such a way that we are not the consumer market of the world. What will we do if we are not marketing useless stuff made in China to ourselves?

6 comments:

Eric said...

The "Debt Snowball" stops when we elect a president like Texas Congressman Ron Paul.

It is GOVERNMENT policy that has gotten us into this mess and it will only get worse if they further meddle in our business.

Dr. Paul has been talking about sound money policies for decades, yet no one has paid any attention.

Anonymous said...

And how about the doctrine of John M. Keynes--a favorite of the left--who directed us to consume our way out of the great depression and create massive public projects that used massive government spending?

Our problem doesn't have to do with the kind of consumption that goes on. It has to do with the idea that our very future depends on mass consumption. And we learned that at the knee of the Keynesians back in the 30's.

Stop buying cell phones, ipods and hanging around the Container Store. It leads to debt.

Prof. Abbott said...

You have very cogently and succinctly summed up a very complicated issue about debt and our economy. I have been a big fan of yours, starting with your book, "Generation Debt." You may recall that you were a guest lecturer in a class that I was teaching at LIM College in New York City a few years ago.
As a fellow future thinker, I was wondering if you saw the fascinating PBS broadcast of "Two Million Minutes" (check it out on Google), comparing education in America with education in China and India using high school seniors from similar socio-economic backgrounds.
The real concern is for the future of America, where we are not educating the future innovators in business and government. Who is going to lead us out of this quagmire in the future? Certainly not any of the clueless political candidates from any political party. You need to rally the youth of America to try to solve the problems of the future today.

Anonymous said...

Re: Mr. Abbot: I understand that our primary and secondary education are not as good as other countries but that our university and post grad are superior to other countries. This goes unreported by most of the big reporters and editors because it doesn't support their argument that U.S. education is in the toilet.

Yet, one only has to look at the number of foreign students who have been coming to the US for university and post grad to understand how other nations view our educational system.

There is no doubt that primary and secondary needs to be cleaned up-- and fast. (I try to do my part through the neighborhood school of my kid.) My point is that this isn't the WHOLE picture.

Anonymous said...

The graduate schools are filled with foreign students, and that is the only reason that they are "good". The other reason is that American college is so expensive that only our schools can have afford the technological toys for the foreign students to play with. American students are mostly morons. Yes, there are a few geniuses, but not enough to compete with India or China. A lot of top grad students are going back to to China and India. Do the research.

Steef said...

Good Job! :)