October 24, 2003
Dangers of Debt Addiction
by Donald G. Mashburn

American consumers like to spend money. In recent years, they’ve come to like it too much. The problem is, they’re spending money they don’t have.

Government reports show consumer credit has reached an all time high in this country. As of last July, consumers owed a record high 19.2 percent of total household income.

Urban income growth was 3.3 percent in 2001. But from 2001 to 2002, household debt rose a whopping 10 percent. Consumers could paraphrase an old saying, “The hurrier I work, the faster I go in debt.”

The online publication CNN/Money described the problem: “The American consumer has become deeply addicted to spending, running up ever higher ... debt ... to live in a fashion that is beyond his means.”

The irony is consumer spending has kept the staggering economy from falling on its face. Yet, the ominous debt figures hold within themselves the potential seeds of our own economic destruction.

This is not too strong a statement. Household debt is at a record high of about 18.5 percent of total household assets! Among the reasons are the Federal Reserve’s deep cuts in interest rates, zero percent financing on new cars from automobile manufacturers, and plummeting mortgage interest rates.

The hocked-to-the-hilt mindset has kept the economy from sliding from the shallow ravine of recession into the deep chasm of depression. Consumers today account for some 70 percent of the total value of goods and services – commonly called the U.S. gross domestic product.

Paul Kasriel, Northern Trust’s director of economic research says, “The idea is to have monthly payments as high as I can take. If you cut interest rates, I’ll get a bigger car.” He could’ve added, “and a bigger boat, more stuff, and more debt.”

American consumers seem to think like Scarlet O’Hara, in “Gone With the Wind,” when she said, “I’ll worry about that tomorrow.”

A sad fact of life is that tomorrow comes regularly for many Americans up to their necks in debt. Bankruptcies cost businesses billions of dollars. In 2002, non-business bankruptcies totaled 1, 539, 111. That means about one out of every 188 Americans – including men, women and children – filed for bankruptcy last year!

Ever increasing debt can’t continue unchecked without adversely affecting the national economy. Ultimately, as losses for businesses mount, jobs will be lost, consumer prices will increase, and wage earners – taxpayers – will be taking up the slack.

Little good can be said of debt. Sure, manageable debt can be useful, such as financing a home, a better car or home remodeling. But when an economic downturn comes, and debtors become unemployed, or income is drastically reduced, virtually all debt is bad.

And credit card debt is among the worst possible kinds. That’s because of the unconscionably high interest rates charged by bank and store credit cards. The high rates are big income sources and are high enough that card issuers can write off significant amounts of bad debt and still make money off credit cards.

But credit cards bring no profit to consumers – only more debt anytime an unpaid balance is carried into the following month. They may also bring stress and strain when their users can’t keep their heads above water and face ruined credit ratings and bankruptcies.

A healthy economy needs active consumers. Active consumers need jobs and a stable or growing economy. But let consumer and government spending, joblessness, or consumer debt get out of kilter and the system becomes unbalanced.

The result can be inflation, stagflation, or even recession or depression. Once destabilized, the system becomes even more hostile to the working consumer. That’s why the dangers of debt addiction should be controlled at the consumer level. As in, if you can’t pay for it, don’t buy it.

Mismanaged debt, on a family basis, can be destructive to household harmony. Collectively, it becomes a threat to our national economic well-being.