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 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
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
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
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
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.
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
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