Budget Basics
Americans Must Stop Digging Themselves Deeper In Hole Of Personal Debt
Friday, January 16, 2004
Ashville Citizen-Times
So when economist Sung Won Sohn of Wells Fargo & Co. was recently quoted by the Associated Press saying of the level of personal debt in America, "In the long run, it's a ticking time bomb," it was quite easy to shrug it off.
Been there, done that.
Well. Been there, done that is still a problem because we're still there, doing that. That being borrowing beyond our means.
According to figures from the Federal Reserve, consumer debt in this nation has inched past $2 trillion. Mind you, that's just things like car loans and credit cards, not mortgages. The average U.S. household's share of this debt comes to $18,700.
Two trillion dollars is a figure that's hard to put into perspective. One way to imagine it is to put a dollar bill flat on a table. The thickness of that dollar is .0043 inches. Stack two trillion of them and the pile would reach 135,732 miles high.
Mount Everest, the world's tallest peak, is by comparison about 5 1/2 miles high.
We're talking not about a mountain of debt, but an entire mountain range of debt.
The reasons for this trend - consumer debt has doubled in the last 10 years - are on one level complex and on another downright embarrassing. The complex part is that new financial regulations and strategies have made lending easier for financial institutions, and that sophisticated sales pitches have made borrowing more alluring to consumers.
The embarrassing part is comments like these made to The Associated Press:
From Howard Dvorkin, president of the nonprofit Consolidated Credit Counseling Services in Fort Lauderdale, Fla.: "The Depression generation is passing on, and we're losing their values. Now we've got an entire generation that doesn't know anything about thrift and careful spending. It's tearing the fabric that made this country great."
And from Robert D. Manning, a sociology professor who authored "Credit Card Nation - The Consequences of America's Addiction to Credit," who described credit cards to the Washington Post as "yuppie food stamps'' - an entitlement, not something earned.
Manning, who teaches at the Rochester Institute of Technology, says the problem dates back to the 1980s, when financial institutions began issuing credit cards and making loans to people who wouldn't have qualified in the past.
After this, Manning told The Associated Press, "People had this sense of entitlement based on the idea that this generation was expected to outperform the earlier generation. It was OK to buy yourself a better standard of living than your parents, and the banks would help you do it."
Manning is sensible and well-versed on the issue. Unfortunately, this makes him a font of bad news, such as the fact that when mortgages are thrown into the mix, American households are about $9 trillion in debt and that the average consumer debt means about $1,700 per year in fees and finance charges. Figures like the latter mean that, "In the old days,'' according to Manning, "the best customer was someone who could pay off their loan. Today the best client of the banking industry is someone who will never pay off their loan."
Of course, customers like that often hit the end of the road, and that road can mean bankruptcy. Consumer bankruptcies have topped 1 million a year every year since 1996, with new records set regularly in the new millennium.
The implications of all this are considerable. Consumer spending drives the economy, accounting for $2 of every $3 spent. Currently, mortgage and credit debt takes $1 of every $5 from the average American's after-tax income. It is not a desirable trend.
Fortunately, many people are trying to combat the trend. As with physical fitness, fiscal fitness becomes a goal for many at the start of another year. Celeste Collins, executive director of Consumer Credit Counseling Service of WNC, says, "This is the time of year when people start taking their debt seriously. They've gotten past Christmas, the bills start coming in the mailbox and the reality hits. People make resolutions to do things like save more, get out of debt, or even balance their checkbooks.''
Collins says the debt numbers are "mind-boggling. What we have seen is folks using home equity to refinance their credit card debt, converting it to mortgage debt. That's not in and of itself a bad thing, but it could be devastating if their credit card debt goes back up. They've taken short- term unsecured debt and put it on a 20-30 year mortgage. If they don't rein in spending they'll rack up more debt and have no home equity to use to get out of that cycle.''
Consumer Credit Counseling is one place where people do turn when they're trying to beat the debt game. Unfortunately, there seems to be something that is built into our national psyche that all too often keeps us from acting until there's a crisis, and that crisis could be dire.
A jump in interest rates - which is inevitable at some point - will make debt even more expensive, for example. And even if a crisis of that type doesn't happen, problems both short- and long- term will continue. Financial stresses are a leading cause of divorce, and if we keep waiting for tomorrow to settle our debts, we're essentially putting off retirement.
The time bomb is indeed ticking. And there's a thing about time bombs we tend to forget.
Eventually, they always go off.
