Might As Well Face It, We're Addicted to Debt!
Thursday, November 29, 2007 | Ethan Roberts Is this Spam?Robert Palmer's 1985 song, "Addicted to Love", came into my mind yesterday as I watched the DOW soar by 330 points and the Nasdaq zoom up 80. But I had to change the words to "Might as well face it, we're addicted to debt!"
It took an announcement by Fed Vice Chairman Donald Kohn to jump start the sickly financial markets. He said that tight financial conditions may merit an ``offsetting'' policy from the central bank. Translation- The Federal Reserve stands ready to cut interest rates again at their December meeting.
Like a strung out heroin junkie, the markets pounced on these words to "shoot up" the major averages, giving us the best two day gain in years. The message was, "Easy credit is back, baby, and we are all getting well."
So financial peace has once more settled over the heartland of America. Keep us fat, happy, dumb, and in debt, and we will all sleep well at night. Anxious, nearing retirement baby boomers who have watched their 401k's plummet in recent weeks, breathed a sigh of relief, putting aside ghastly visions of themselves in their mid 80's, mumbling "Welcome to Wal-Mart"!
The irony here is that we need low interest rates to bail us out of the recent financial mess that was created by....er...low interest rates. Yesterday's hinting of a FED easing was akin to "Hair of the dog", that old English expression which refers to ingestion of alcohol as the treatment for a hangover.
But Wall Street does not worry about such things, since corporate profits can only be driven these days by the ongoing American addictive lust for consumer debt. Consider these statistics from a 2003 MSN Money article:
" The average amount of credit card debt in households with more than one card is now more than $8,000... Thats 167% more than the $3,000 average for households in 1990.
About 43% of American families spend more than they earn each year.
Personal bankruptcies have doubled in the past decade.
Revolving debt currently totals $735.3 billion; that's about 31% higher than it was only five years ago. The figure has more than doubled in a decade.
The average American has 2.7 bank credit cards, 3.8 retail credit cards and 1.1 debit cards, for a total of 7.6 cards per cardholder.
More than 1 million homeowners now have three or more mortgages on their property. Meantime, over 1.8 million owners have outstanding loans that equal 100% or more the value of their homes."
More and more students are graduating from college with huge debt from student loans and credit cards. Hey, why wait until your 30's or 40's to accumulate debt when you can get a head start right out of college?
So yesterday's hinting of a FED "fix", while terrific for the short term high it produced, does not solve America's financial problems, and may in fact exacerbate them. All it does is keep the grease flowing for buying those big screen plasma TV's, Wi-FI games, and expensive Coach handbags this Christmas. Maybe VISA will drop your credit card interest rate from 22% to 20%. And you can still "See the USA in your brand new Chevrolet!"
Gee whiz, I'm sorry to pour water on everyone's good time. But I think we need to get back to being a society in which, to quote Dave Ramsey, "Cash is king and debt is dumb". A funny thing happens when people get out of debt. Instead of throwing away money on credit card interest, car loans, and high priced mortgages, they have more disposable income to spend on Christmas gifts without worry!
There was a time when America was the most prosperous nation in the world. But our national obsession with, and our addiction to debt threatens to destroy that prosperity and cripple our ability to grow wealth.
So let's make a pledge today to eliminate, or at least reduce substantially, the American addiction to debt. And more importantly, we need to teach the youngest generations of Americans to return to those archaic behaviors and values of saving, investing, and paying cash for only the things they can afford!
Remember, you don't become a Tycoon by being over your head in debt!
