Kicking Our Addiction to Debt

[RedEarth]

Barron’s Alan Abelson references Henry Kaufman in this week’s column:

As the root of our current woes, Henry unreservedly cited decades of ballooning debt. More specifically, since 2000, he noted, nonfinancial debt outpaced the growth in nominal GDP by nearly $8 trillion, or more than double the gap in the 1990s.

While debt spiraled wildly upward, savings shrank like a big, fat snowball at high noon in the Sahara. Savings, in case you’re too young or too improvident to remember, are what folks have left of their paycheck after taking care of important business like buying one of those pricey TV sets and less-compelling needs, like eating and paying the mortgage.

And the best part about those decadent decades was that even when you spent the last penny of your income and your piggy bank was empty, you could still get plenty of eats, baubles and that giant-screen TV with all the whistles and bells, with a swipe of your magical plastic card or by leveraging the eternally rising value of your dear old homestead.

Henry relates, more in awe than censure, from 1960 to 1990, the growth of nonfinancial debt averaged a rather sedate 1.5 times the growth of nominal GDP, while the savings rate averaged a healthy 9% a year. From 1991 to 2000, things got a bit racier, but not obscenely so: Debt outpaced GDP by 1.8 times and the savings rate averaged 4.7%.

Since 2001, though, borrowing really took off in mega fashion: Aided and abetted by the great housing bubble, debt soared twice as fast as GDP, while the average annual savings rate dwindled to a skimpy 1.4%, and in recent years, more often than not, flirted with zero.

As Henry points out, there’s no way around it: We’ve got to kick our addiction to debt if the world is to regain some semblance of financial sanity. On that score, we might interject, one can detect a kind of grim upside to the economic horror afflicting us: It’s already done wonders in raising the consciousness of just plain folks — if not necessarily that of Washington and Wall Street — to the perils of sinking deep into debt.

http://www.ritholtz.com/blog/2008/12/kicking-our-addiction-to-debt/

[no_hypocrisy]

1. Trouble is that too many interests want to keep us addicted to credit.

Banks, financial institutions need our credit for their bread and butter. Points, interest, compound interest, late fees, annual cardholders fees. And the price of what we're purchasing is inflated due to the availability of credit. If we could save for a few years to buy a house w/o a bank/mortgage, the value of the house would be affordable. Same thing with purchasing motor vehicles.

The system is set up for ordinary consumers to live beyond their means. Going to a system where you buy what you can afford might cripple the economy to a degree.

[louis-t]

2. Not nearly as bad as what is happening now.

[Donnachaidh]

3. we didn't set up that *system*

And it's for damned SURE that those who benefitted from that system can give two shits about the people drowning in debt, and losing homes etc.

Have you heard ANY of the Wall Street people say ANYTHING about those homes that are still being foreclosed on?

They are too busy lining up waiting for their piece of what's left in the Treasury.

Do *I* care if that wretched system goes belly up? HELL NO.

And people can really get their thoughts across NOW by refusing to chain themselves to a system that is flawed in favour of the few wealthy groups at the top.

F*ck em. You reap what you sow.

Someone sent me a picture of a protester in Wall Street with a sign that says - "JUMP you f*ckers*. And they should. :grr:

[Citizen Number 9]

4. Ummmmm....

How hard is it to just say no?

Maybe parents should have done a better job at bringing us up so as not to value material possessions so much.

[glowing]

5. I do not live in the land of luxury.. At times credit cards were the way

we paid for formula and diapers.. If pay kept up with the ever increasing costs of living, we wouldn't be in this mess.. Walmarting America was a stupid RepubliCON idea.

[Citizen Number 9]

9. Credit cards are fine

If you have a valid plan for paying back the credit you are getting.

I have noticed that as workers become more skilled and experienced they are able to command higher rates of pay over the length of their careers. It's always a gamble to spend money you don't have, however.

[DJ13]

6. The abuse of credit coincides with the decline in real wages

It took nearly 20 years for the Republicans and their corporate buddies to get there, but when Bush was selected in 2000 that became the tipping point for wage gains here in the US.

People were supplimenting a stagnant or declining wage with easily obtained credit after that, as employers knew there would be no consequences with the deregulation obsessed Republicans in charge.

Yes it was stupid, but its the employers, bankers, and our politicians who are mostly responsible.

Pay people a wage adjusted for inflation to be equal to the wages they would get from 1970 and people would save like they used to back then.

[Warpy]

7. You get the gold star for connecting those dots

Even adjusted to official inflation rates, our pay would have been woefully inadequate because of the bogus way inflation has been assessed, thanks to Greenspan's meddling with the CPI market basket.

One of the big jobs to be done is to find out what the real inflation rate has been since 1969 so that we can begin to address just what a living wage these days really is.

[Sherman A1]

8. Make that 2 gold stars for connecting the dots

nailed it.....:toast:

[anigbrowl]

11. I've been thinking for a while that something I'd like to see is a 'national audit'

I'm torn between throwing the economy into a holding pattern for a year while we have a metaphorical huddle to work out where we are and what the gameplan is for the next decade or so, or making a snap diagnosis and just flooding the economy with money instead, with the idea that we have a bout 5-10 years to inflate our way out of the problem - deliberately eroding debt and large asset holdings through currency inflation, and essentially using monetary policay as an instrument of redistribution. This will entail a considerable of waste, but we need a really big omlette.

I think this latter option is what Bernanke and co are doing...

[notesdev]

10. And follows the transition to two-earner families

Remember (if you're old enough), it used to be the norm in this country for a single person at an average wage to provide for a family. Imagine trying to support three dependents on an average wage today.