My friend lived for a while on credit cards. He had no money coming in, lots going out and only the cards to buy things. He had little intention of making repayments, and less ability to do so.
His credit rating plummeted as debts mounted. His phone was besieged by callers demanding he start a repayment plan. But amazingly at the same time other credit card firms began to clamour to lend him more money. Out of the blue, credit card companies he had never heard of would send him attractive offers through the post.
His mailbox was stuffed with them. All offered instant cash. Just sign the contracts, they promised, send them off and begin spending. It was insane.
Then one day in a bar in SoHo he opened an envelope and out slipped a shiny new silver credit card. The companies gave up sending him contracts, upping their game by delivering actual credit cards instead. It was preapproved for thousands of available dollars. He just had to sign it and he could buy the whole bar a round of drinks.
”This is crazy,” he said. The card came with a huge contract in tiny type and you got the feeling that buried in it somewhere were clauses about severed racehorse heads and, right at the bottom, possibly one surrendering the rights to your eternal soul.
Now this guy’s lifestyle choices are far from advisable. But, sadly, it provides a worrying insight into how much of the American economy works. It is all built on massive debt. And worryingly, there are a number of people who believe it also might just stop working.
A fax came through to my office the other week, touting a book on just that subject. The publishers blurb promised; ”A chilling picture of a debt bloated America that seems headed down the same self destructive path of the Roman Empire.” Now, if that does not get your attention, nothing will.
Here are some figures. Whatever your politics, they should scare you. The US federal debt stands at $8,2-trillion. Yes: trillion with a T. American household debt — meaning ordinary Americans’ mortgages and such debts — dwarfs even that. It stands at $11-trillion.
The concept of saving has all but disappeared in the United States. Last year the personal savings rate hit its lowest level since 1933 — during the Great Depression. Then mass unemployment and economic collapse meant Americans could not save. Now debt is driven by the opposite force: mass consumption. Living on debt has become a preferred lifestyle choice when once it was an emergency hardship.
On an individual and a government level America is spending way beyond its means. The average American household now owes $8 000 in debt on credit cards alone. Meanwhile the government equivalent of credit card spending has seen the deficit hit a record $423-billion. With the war in Iraq showing no sign of ending and the imminent retirement of millions of baby boomers, there is little ability — or some might say, will — to pay that money back.
This looks like a system waiting for collapse. Certainly that’s the argument of Empire of Debt, the new book whose publicist is so keen to invoke the Fall of Rome. Authored by financial writers Addison Wiggin and Bill Bonner, it argues a system so full of debt must collapse sooner or later.
They think sooner. ”The denial that comforts us today also keeps us from seeing the catastrophe that’s rushing towards us like the proverbial freight train,” says Wiggin.
Of course, there are those who say this is all so much doom mongering. Some say debt is not really a problem. It is, in fact, a sign of people’s faith in American economic health. Others say the sheer size of the numbers is misleading. Yes, the budget deficit is a record, but they point out that as a percentage of gross domestic product it is actually less than in the mid-Eighties. There have been previous scares, they point out, and the economy and Wall Street are still growing strongly.
This is where the argument becomes one between economists. I do not have the answer. I just remember my friend sitting in the bar in SoHo holding his new credit card. Should he damn the consequences and spend, spend, spend? He cut it up. The card was too easy. Money that simple had to have serious fallout further down the line. There is a lesson in that for all Americans. Not least the one sitting in the White House. – Guardian Unlimited Â