America's borrower-industrial complexHoly shit....maybe the end times really ARE near!
By Marshall Loeb, MarketWatch
Last Update: 5:01 AM ET Apr 23, 2006
NEW YORK (MarketWatch) -- A fast-rising new book by a provocative conservative shows how the debt explosion is hurting our country
Almost overnight, it has hurtled to the top of the best seller lists. Its title is "American Theocracy," its author is Kevin Phillips, a former top Republican strategist and leading conservative intellectual, about whom Time magazine once wrote, "in the shoot-from-the-hip world of Washington prognostication, Kevin Phillips stands out like Nostradamus."
Now his controversial argument, which clearly has struck a chord, is that America is deeply endangered by a combination of three forces:
One: The nation's global overreach, demonstrated by the so-far-unsuccessful invasion of Iraq.
Two: The surge of militant, fundamentalist, evangelical, right-wing religion in the U.S.
Three: America's ballooning debt, which has mortgaged the country's economic health to financial speculation.
Let's look at that last point in depth, since Loeb has read the book, I have not, and he talks on this point. Plus, I think that long term, this point has more meaning than the other two, easily correctable errors of judgement:
Phillips argues that the U.S. economy is being kept afloat by a splurge in consumption that is being financed by awesome debt. Americans carry an average of eight credit cards per household and pay interest charges of 19% to 25% on their balances. Between 1990 and 2003 the number of people holding credit cards jumped by 75% -- from 82 million to 144 million -- but the amount actually charged exploded by 350%, up from $338 billion to $1.5 trillion.Lest you think it's only you. We're all paying out money we've promised to earn. Four percent may not sound like much, but compare it to just about any other developed nation, including those so-called "high tax socialist havens" like Scandanavia, where despite higher taxes, people manage to sock away upwards of ten percent of their earnings each year.
Yes, it is really true that Americans spend more than they earn. For every $1 that they earned in 2004, debt-engulfed Americans spent $1.04. Their mantra became, "I shop, therefore I am."
Now you're talking a 14% deficit.
It would be easy for the Right to blame consumers (which they would anyway...damned Americans and their Game Boys and iPods...a nonsensical argument if I've ever heard one), but it's not just consumers spending money they don't have. Debt implies risk, and it appears corporate America is filled with gamblers looking to bluff with a pair of threes:
Meanwhile, record issuance of low-rated bonds prompts David Hamilton, director of corporate bond default research at Moody's to observe that "this percentage of really risky debt is unprecedented."Moody's a long-established debt rating service, and so has some experience with this issue.
Phillips is no long-haired, sandal wearing vegan Beetle driver, either. Let's take a look at his analysis of all this:
[During the Bush administration] A substantial part of Washington's strategy, writes Phillips, has been to create a low-interest-rate boom in real estate, thereby raising the percentage of American home ownership, ballooning the price of homes and allowing householders to take out some of that price increase through low-cost financing. Through home-equity loans, owners turned their houses into ATM machines.[...]Guess who gets hit the hardest by this simultaneous loss of income and increase in debt....
The media relayed a war-time initiative: "Uncle Sam wants you to borrow."
"Never before," writes Phillips, "have political leaders urged such large-scale indebtedness on the American consumer to rally the economy."
Meanwhile, he notes, there was a troubling growth in U.S. income inequality. "The top one percent of Americans in 2000 had as much disposable (after tax) as the bottom 100 million, or 35 percent of the population."
One of the reasons was that the U.S. economy -- and the labor force -- was fast shifting away from manufacturing, toward financial services. Congress, lubricated by lobbyists, sped the process by deregulating banking and other financial services in the late 1990s. Banks were allowed to buy brokerages, securities firms were permitted to acquire life insurance companies, or be acquired by them.
The debt and credit explosion hit many groups of Americans, but none more than the elderly. Those reaching retirement during the 2000s were less likely to own their homes than before. Those already over 65, said The New York Times, not only have the fastest-growing home debt but also the fastest-growing share of bankruptcy filings and the biggest growth in demand for credit counseling.It's that last bit that I find the most troubling.
More and more of the elderly are in outright financial distress. One in seven households headed by someone 45 or older was considered heavily indebted in 2001 -- devoting at least 40 percent of their income to debt payments.
People over 45 are in their prime earnings years, or just about to start them. This is when you squirrel away money for retirement, for your kids' college funds, and have a cushion in case of health problems, which start to happen around this time of life.
So what happens now? How many people will go on welfare, only to find out they can't? How many will file bankruptcy hoping for a clean start, only to find out how much harder it is now to declare? How many will simply walk away from their debts?
Which will destroy the American economy. Flat out. It will make the Great Depression seem like a picnic.