Credit Card Crack
by Stephen Pizzo

March 1, 2004
First Published in Tom Paine.com

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Borrow, spendóborrow, spend. No, I am not talking about the Bush administration this time. I'm talking about you.

That's right, you, the American consumer. Not only is the ship of state heading full steam towards the shoals of deficit disaster, but its passengers continue to party as the band plays on.

An administration chorus accompanies the band, singing the praises of rising economic indicators. But their jaunty ditty highlights only carefully selected indices. There are all kinds of rising indicatorsósome good, some bad. The administration's hymnal only lists the good rising indicators. Let's look at them all: the good, bad and the ugly.

The Good:

  • The stock market is on a tear. Stock indexes now stand at levels not seen in almost three years. Companies that have downsized and exported jobs to cheaper labor venues are reporting profits again.

  • Home sales and home values are way up thanks to low interest rates.

  • Worker productivity continues to rise as companies continue to squeeze more output from fewer workers. Overtime is up but hiring remains lowóa major contributor to higher productivity-per-worker stats.

  • The U.S. economy grew at around 4.2 percent during the final three months of last year. The main drivers of this growth were consumer spending and companies investing in new plants and equipment after putting off capital improvements for the past three years.

  • After Christmas, U.S. retailers reported that same-store sales rose 4.2 percent in December 2003, the biggest gain since a 6.7 percent jump for the same period in 1999.

Now, those for those other "rising indicators:"

The Bad:

  • The Federal Reserve reported in January that U.S. consumer debt had finally topped $2 trillion. This has prompted more than one economist to compare the explosion in consumer debt as "alarming," comparing it to the stock bubble of the late 1990's.

  • Consumer debt now costs the average household nearly $2,000 a year in finance charges and fees.

  • Total credit card and car loan debt, (excluding mortgages,) translates into an average debt load per U.S. household of $18,700.

  • Outstanding consumer credit, (including mortgage and auto loans) reached $9.3 trillion in 2003, representing a $2 trillion increase in less than 36 months.

  • According to the Federal Reserve, household debt for rentersóas a percentage of total assetsóreached a historic high and exceeded 28 percent in the second quarter of 2003.

  • American consumers now spend a record 18.1 percent of after-tax income just to cover existing debts.

The Ugly:

  • Homeowners are using their homes like wallets. It's one thing to refinance a home loan to capture a lower interest rate and quite another to take existing equity out of a refi by increasing the size of the loan. Over the past 36 months, the volume of "cash-out" refinancings exploded from $59.1 billion to $203.3 billion. In the fourth quarter of 2003, an astonishing 45 percent of Freddie Mac-backed refi loans were larger than the original mortgage.

  • And mortgage foreclosures have not been far behind. The percentage of mortgage loans in foreclosure jumped to 1.15 percent in 2003, compared to 0.87 percent in 2000.

  • The American Bankers Association reports that credit card delinquencies reached a milestone, 4.09 percent, in November 2003.

  • As credit card delinquencies rise, card issuers levy late fees, over-the-limit penalties and jack up the interest rate. According to Bankrate.com, by the end of 2003, late fees and penalty interest accounted for more than 30 percent of card-issuers' profits, predicted to reach 40 percent by the end of this year.

  • The research firm Economy.com reports that the number of car repossessions in 2003 jumped to 1.3 per month per 1,000 loans, up from 0.84 in 2000.

  • The fastest-growing segment over its head in debt is the elderly. Squeezed by higher health insurance and drug costs and struggling to maintain their pre-retirement lifestyles, those over 65 have turned to credit cards to close the gap.

  • And, not surprisingly, the American Bankruptcy Institute Consumer reports that personal bankruptcies have climbed steadily since 1996 (the first year the number surpassed 1 million) reaching a record 1.54 million in 2002. Non-business bankruptcies now account for 97.8 percent of all bankruptcies filed in federal courts.

So there you have itóthe real driving force behind this recovery is you, your friends and family in partnership with the credit industry marketing credit cards like drug dealers push crack. Consumers have taken a page from the president's own philosophyódeficits are good when times are tough, so if you can't afford it, just say "charge it."

Consumer spending now accounts for roughly 70 percent of the U.S. gross domestic product, prompting this comment in a recent CNNMoney.com editorial: "The world economy is leveraged to the U.S. consumer. And the U.S. consumer is leveraged to the hilt."

Robert D. Manning, a leading expert on the credit card industry and author of the book Credit Card Nation: The Consequences of America's Addiction to Credit, says that the American middle class refused to adjust its spending habits after stock market bubble burst or after the loss of high-paying jobs. Rather, they turned to credit to maintain a lifestyle that they came to see as social entitlement. For those consumers, Manning writes, credit cards became a form of "yuppie food stamps."

Consequently, Standard & Poor's chief economist observed recently, "We've never had so many who owed so much."

Which brings me back to the current anemic recovery. Other than filing bankruptcy, the only way to get out of debt is to pay it off. And, short of turning to a life of crime, the only way to pay back debt is with money earned working. But the kinds of high-paying jobs that once made that possible are gone and this recovery is not creating new ones. Instead, more than 70 percent of the few jobs are in low-paying service sector.

This leads anyone who can think ahead to wonder what will fuel a continuing recovery. After all, consumer spending now accounts for about 70 percent of the nation's total economic activity. If they can't earn good salaries and they can no longer get easy credit to fuel consumption, then the jig is up. And economists are indeed beginning to see just that. Last August the consumer-spending index fell 0.3 percent, three times the fall they had predicted. Americans' already embarrassingly meager personal saving rate, (calculated as disposable income minus spending,) is falling even further, down to less than three cents on a dollar earned.

There is probably one last spasm left in consumers when they receive their 2003 tax refunds. Considering how many families now live paycheck to paycheck, such refunds will almost certainly be spent within days. So, expect to see a short spike in retail sales this spring and early summer.

But then will come the great reckoningójust in time for the November elections.

Stephen Pizzo is a journalist living in Sebastopol, CA, and author of Inside Job: The Looting of America's Savings and Loans (Harper Collins, 1991). This article first appeared in Tom Paine.com.






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