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Consumer debt is skyrocketing.  What does  that mean for the U.S.? But will the consumer debt bubble burst?

by Eileen Alt Powell
The Associated Press
May 17, 2004

TWO TRILLION DOLLARS. That's what Americans owe on short- and medium-term loans. Add in home mortgages, and consumer debt in the United States rises to almost $9 trillion.

The mountain of personal debt has climbed to the highest level ever in the nation's history. The figure for short- and medium-term loans has doubled in ten years, and that has experts worried, for they see consumer debt as a bubble which will inevitably burst. When it does, the result could be worse than the Great Depression.

Who's to blame? We are, of course. With easy credit and low- and no-interest loans, we are spending ourselves to death, to support a grander lifestyle than our incomes justify. Our personal economic well-being teeters on a three-legged stool of income, high home values, and low interest rates. Knock any one of the legs away, and down we will fall.

The inevitable rise in interest rates, for example, will stress families with adjustable rate loans or those who have high credit-card debt. There are many for whom nonchalantly whipping out the plastic has become a way of life. And while 40 percent of consumers pay their credit card bills off every month, the remainder carry an average of close to $13,000 in credit-card debt. The resultant $1700 per year in finance charges and fees is what keeps consumer credit companies happily soliciting more business via mailbox-clogging credit card offers, but all that debt can undermine family finances in a flash.

Not surprisingly, personal bankruptcy is at an all-time high. In 2003, 1.6 million cases were filed, according to the American Bankruptcy Institute. That's not good for anyone. While some see filing for bankruptcy as a "quick fix," the reality is that taking that step will affect a consumer's credit rating and financial opportunities for a long time. And who absorbs the cost of the unpaid debt? Eventually, the American public.

Despite the nation's debt overload, experts say it is consumer spending that is fueling the economic recovery, so few are willing to recommend old-fashioned values like thrift. Still, as Federal Reserve Chairman Alan Greenspan noted on May 6 in Chicago "the free lunch has still to be invented"--living beyond our means will come back to haunt us.

What's the answer for the average Virginian? Be aware of the temptation to overuse low- or no-interest loans, or to calculate affordability simply by matching the monthly payments to what's left of your paycheck. Do the math--some "rent-to-own" deals, for example, can result in annual interest rates as high as 800 percent. In short, handle credit with care, or what's in your pocket could become a ball-and-chain around your financial foot.

Postscript

For some, stopping at the store for a lottery ticket or making a quick trip to Atlantic City is an alluring way to resolve financial problems. However, as Tom Nasta of Personal Financial Planning in Roanoke pointed out in a recent story, it's not at all unusual for people to go broke after winning big in the lottery. Furthermore, a study by researchers from Purdue and Georgetown universities showed that "the proximity of casino gambling appears to be associated with higher bankruptcy rates."

The moral of the story? "We must make our election between economy and liberty, or profusion and servitude." Wise words from a fellow Virginian, Thomas Jefferson.