CNN: Spending our way to disaster

[BadGimp]

Spending our way to disaster

The consumer debt bubble in the United States could make the stock bubble seem like nothing.

October 3, 2003: 10:32 AM EDT
By Justin Lahart, CNN/Money Senior Writer

NEW YORK (CNN/Money) - The American consumer has become deeply addicted to spending, running up ever higher levels of debt in order to live in a fashion that is beyond his means. And the world has become equally addicted to the consumer continuing to burn through cash.

It's a dangerous situation -- potentially a bubble that dwarfs even the U.S. asset bubble that burst in 2000 -- and it will be a challenge for policy-makers to keep it from ending badly.

The perseverance of consumer spending over the past several years is credited with keeping the economy afloat, but it didn't come without consequence. In order to keep on living in the manner they became accustomed to during the boom years, Americans went deeply into hock.

"If there's a bubble, it's in this four-letter word: Debt," said Merrill Lynch chief North American economist Dave Rosenberg. "The U.S. economy is just awash in it."

http://money.cnn.com/2003/10/02/markets/consumerbubble/index.htm
===================================================================

NOW is the time when we need real leadership. But all we have is this Bush boy king.

A true leader would never allow his people to slouch toward disaster without sounding a warning bell and rallying the peolpe's attention to the pending economic clamity that appears to await us in our not to distant future.

[oneighty]

1. Paying down

people I know have stopped unecessary spending and are concentrating on paying down their debt. A wise move.

180

[Skittles]

2. I don't get it

WHY do people need jewelry, TONS of clothes and shoes, hundreds of CDS, blah blah. People need so many THINGS. :puke:

[DuctapeFatwa]

3. Some are doing it because they are scared of the future

For example, someone who already has serviceable shoes may charge a few more pairs on a credit card because they are afraid that when the current ones wear out, the price will be too high, and/or they will be unemployed, and although it is not good to have credit card debt when you are unemployed, you will need shoes to look for a job.

Some get neurotic about it, and go into a kind of "hoarding" thing, buying winter coats for kids thinking of future winters, forgetting that the kids will be much larger by the time those winters arrive!

So while some of it is as the author says, people wanting to live the way they did when they had more income, for many it is a kind of "better get it now while I can" panic.

[spinbaby]

4. That may not be it

I remember reading something recently--my apologies, I can't remember where--about how consumers actually have less income to spend on discretionary items like CDs because the price of necessities like housing, transportation, and medical care have gone up. In other words, consumers are actually spending less on discretionary items but are being pinched and going into debt because of the rising price of necessities and downward pressure on wages.

[shanti]

22. and probably what

started the boom in kazaa downloading. hey, if you can get the "extras" for free...?

[Larkspur]

6. It's not that they need it, it's that consumerism is all that powers our

economy and the CEO's want their fat stock options. Haven't you ever noticed that our economic health is basically measured in retail sales. No other factors seem to balance that, like how much people are saving towards their retirement.

[DBoon]

7. In a capitalist society

possessing commodities defines your worth as a person. Alternative value systems were stamped out long ago.

[maggrwaggr]

8. don't you watch television?

all that stuff will make you happy and complete.

[treepig]

5. ok, you posted it first . . .

:crazy: :freak: :crazy: :freak: :crazy: :freak: :crazy: :freak: :crazy: :freak: :crazy: :freak: :crazy: :freak: :crazy: :freak: :crazy: :freak: :crazy: :freak: :crazy: :freak: :crazy: :freak: :crazy: :freak: :crazy: :freak: :crazy: :freak: :crazy: :freak: :crazy: :freak: :crazy: :freak: :crazy: :freak: :crazy: :freak: :crazy: :freak: :crazy: :freak: :crazy: :freak: :crazy: :freak: :crazy: :freak: :crazy: :freak: :crazy: :freak: :crazy: :freak: :crazy: :freak: :crazy: :freak: :crazy: :freak: :crazy: :freak: :crazy: :freak: :crazy: :freak: :crazy: :freak: :crazy: :freak: :crazy: :freak: :crazy: :freak: :crazy: :freak: :crazy: :freak:

[booksenkatz]

9. Other variations

[yella_dawg]

10. I'm worried that the consumer spending that is driving our slack

economy is coming from home equity extracted during home refinancing. That's a bubble that's got to pop soon. Anyone been following this?

[AP]

15. Did anyone see how congress refused to regulate FannieMae/Freddie Mac

more closely last week?

And there's probably no better sign that the foretells doom than the fact that Forbes had to spin this so hard to make it look good: "HOORAY FOR CONGRESS" they say. Despite the postitive headline, they can't hide the truth...but then keep reading...see how they think the free market witll solve all the problems.

NEW YORK - On Tuesday evening, the U.S. House Financial Services Committee tabled the markup of H.R. 2575. And that's just where the bill should stay.

The bill calls for increased regulation of Fannie Mae (nyse: FNM - news - people ), Freddie Mac (nyse: FRE - news - people ) and the 12 Federal Home Loan Banks that form the backbone of the mortgage lending market in the United States. Critics contend that placing these organizations under the supervision of an "independent" U.S. Treasury-based regulator would cut back their lending ability. The biggest fear, for both lenders and borrowers, is that a new regulatory regime would hike up the amount of capital the banks must keep on their books to protect against bad loans.
...

But there is trouble on the horizon. In the past three weeks, three Federal Home Loan Banks announced both real and accounting-based earnings shortfalls. The New York Federal Home Loan Bank, collectively owned by regional lenders, cut its third-quarter dividend to members. And, on Wednesday, derivative accounting corrections brought about accounting noncash losses for the Atlanta and Pittsburgh Federal Home Loan Banks.
...

Greater knowledge of the risks inherent in the companies, despite the real or implied government backing, will allow the stock and bond markets to better read the companies. The Federal Home Loan Banks may also be required to register their nontraded equity.

If investors decide that the companies' debt is becoming riskier, the market will price that in. Then, the self-evangelists of their own charters to facilitate home ownership, Fannie, Freddie and the FHLBanks would adjust their operations accordingly.

The current administration and legislative regime doesn't feel that's the case. But, with the recent House Committee action, at least they're giving it a little more thought.

[ozone_man]

18. Yup, consumer spending will drop off a cliff soon,

especially if rates go up. Between credit card debt and mortgage debt, the consumer is now pretty well maxed out. 2/3 of GDP is consumer spending. Not a good time to invested in real estate or stock market, in my opinion.

[Wickerman]

21. So, look for the bankruptcy laws to finally get passed

they gotta protect the corporate entity - never mind that the CC companies prey on people to get them to max out cards.

[section321]

25. Lots of people follow it, and no one can decide what will happen...

That's the trouble...you can't be sure you're in a bubble until it pops.

[damnraddem]

11. Consumer debt? Come on! What about ...

Dubya's federal government debt?

[Yavin4]

12. Yes, We Will Soon Have A Huge Credit/Default Crisis

Americans have continued their late-90s boom spending habits, even though the economy has not generated a single net new job since the end of the 90s. Incredibly cheap debt, the prime rate is at 4%, has encouraged people to pile on the debt to offset their income losses due to a poor job market. Cheap debt is also the reason why the markets are on the rise this year.

If short term interest rates tick up just a bit, we could see major bankruptcies across the nation.

[FlashHarry]

13. Interesting Salon interview on the same subject

http://salon.com/tech/feature/2003/10/13/bankrupt_parents/index.html

[TNDemo]

14. How credit card debt happened to me.

Luckily I don't have that horrible demon to deal with any more but 12 years ago we were up to our necks in debt and struggling to stay alive. We had nothing to show for it - no clothes, furniture, trips or anything fun. All we did was get the cash to cover bills. Doesn't take long doing this to really get sunk. I read somewhere that just coming up $2 short per week will put you in an unbelieveable amount of debt when interest is added in just a few years. It was mainly medical bills and unexpected expenses that did it to us. Back then there were no co-pays on insurance and everything was cash on the spot and then hopefully you could get some reimbursement from your insurance company. I had three kids with bad ears. Just one visit would be $100 between doctor visit and medication and then that would not work and we would have to change the medicine. Another kid had a bladder problem. One time when she was 9 it took two months, two outpatient hospitalizations and lab several times a week before it cleared up. Then of course the car pooped out. And it doesn't even take into consideration how much unpaid time I had to take off of work.

All that to say that not everybody is living the high life on their credit cards. A lot of people are just trying to not be homeless.

[Gloria]

16. This will also disturb you: the yanking of assets out of the US...

http://www.democraticunderground.com/discuss/duboard.php?az=show_topic&forum=114&topic_id=1839


JAPAN: THE RAPID RUN ON DOLLAR ASSETS

By Hussain Khan

TOKYO - With the Nikkei stock average currently flirting with 11,000, up about 45 percent from its post-bubble 13-year low of 7,607.88 in April, it is starting to appear that a run on US dollar assets could well be causing the rise in Japanese stock markets.

SNIP


The flight of global investors from the dollar has serious implications, not only for the health of markets such as Japan's, but because of the peril to the US economy and thus the global economy as well, for which the United States has acted as economic engine and importer of last the resort. The US must take in $55 billion per day in investment in government paper and securities to fund the enormous deficits in its fiscal budget and its current account, the total balance of goods and services it trades with other countries. The current account deficit is expected to hit more than $540 billion in 2003, with the fiscal deficit trending towards $600 billion when off-budget liabilities are factored in.

MORE

[LawDem]

17. It's about more than spending: It's also about economic inequality.

You should read James Galbraith's "Created Unequal." Consumer debt isn't just about over spending; it's also about economic inequality. Ordinary people are getting a much smaller piece of the pie than was true thirty years ago. And as Galbraith points out, what the top 1 percent is doing with their ever increasing percentage of that pie is loaning it back to the rest of us. Thus, economic inequality isn't just about the haves and the have nots anymore: It's really about creditors and the debtors.

[burythehatchette]

19. Therein lies the truth

Few creditors...many debtors...upward redistribution of wealth (S&L, war profits, energy rip-offs, etc)...

This bubble is a burstin'

[newyawker99]

27. Hi burythehatchette!!

Welcome to DU!! :toast:

[stevebreeze]

20. This is why the so-called conservatives

don't mind the ever spiraling out of control federal debt. The federal debt is a transfer payment from those who pay taxes to those who lend to the government.
:kick:

[bahrbearian]

23. They get to run and Hide in their Money!

[Nottingham]

24. Especially when Credit Cards are charging 15-18% rates

That is taking advantage of people!

Because of their Greed its probably going to collapse! :bounce:

NO JOBS does that :bounce:

[TrogL]

28. Capital One

(more examples)

charges anything from 25% to 50%.

Many people have run afoul of their credit card companies (which charge < 20%) and have signed up with Capital One (who will take almost anybody), if for no other reason than you have to have a credit card to rent a car, get a hotel room, pay by cheque or send donations to DU.

[sendero]

26. No payments 'til 2005!

We live in a culture that literally encourages debt. Interest free for 12 months! (bullshit, it is really "interest charges folded into the price") Buy now, pay later!

Credit cards are handed out like candy to people who *already* have wrecked credit. Companies are *so* desparate to sell their wares, they will sell them to anyone, even people they know are likely to not be able to pay.

Americans are addicted to looking prosperous whether they in fact are, or are not. People spend like they will make as much as they make now as far as the eye can see, but of course that is not true.

I've never believed in debt much, and other than houses I've not borrowed a cent in over 20 years. All of my posessions, including my house, are paid for. But I'm still worried enough about this situation that I've gotten almost completely out of the stock market, and my wife and I have stopped buying anything non-trivial without a lot of hand wringing.

As far as I'm concerned, if we avoid a long protracted economic disaster, we will have been very lucky indeed.

[E_Zapata]

29. Yeah, the fashion beyond my means includes:

food (beans not steak!)
heating bills
internet connection (so I don't die uninformed!)

Yes, we are all just trying to live the high life.

I recall a few years back when grocery stores started taking credit cards. It was surreal to me back then. Now it's a good way to ensure one has food on the table.