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?
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?