Are you spending your way to disaster?

[Ripsnort]

Good article.

Spending our way to disaster [/size]
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.

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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."

Indeed, consumer credit and mortgage debt are both a higher percentage of disposable income now than they've ever been before. Nor do these rises in debt levels appear justified by the rise in the value of people's homes -- household debt as a percentage of household assets (what you owe versus what you're worth) has also never been so high, according to the Federal Reserve.

How did this come to pass? We live in an economy that has become deeply dependent on the American consumer for growth. U.S. consumer spending accounts for around 70 percent of U.S. gross domestic product. So nobody wants to see the consumer falter, and they have been doing their darndest to make sure that doesn't happen.

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The Federal Reserve has cut rates like never before, allowing mortgage rates to come down this year to their lowest recorded levels. Car companies have offered zero percent financing for two years now, and they've recently begun offering it on 2004 vehicles.

But rather than using such rate reductions as an opportunity to save money, consumers have, as a whole, used them as an opportunity to spend more.

"We're a what's-my-monthly-payment nation," said Northern Trust chief U.S. economist Paul Kasriel. "The idea is to have my monthly payments as high as I can take. If you cut interest rates, I'll get a bigger car."

Financial companies have got into the act, too, offering people ever-more efficient ways of running up debt. Hardly does a week go by without a new credit card offer coming in the mail.

Or consider credit cards like Wells Fargo's NowLine Visa Platinum, which allows you easy access to a home equity line of credit. You can use it, says Wells in its online promotion, to help pay "for everyday expenses, like gas, groceries, clothes, etc."

Codependency, anyone?
Other countries share in the deep commitment to keep U.S. consumers laying out their cash. Big exporters -- Japan and China in particular -- have strived to keep their currencies low against the dollar, allowing Americans, in effect, to buy more of their stuff. U.S. consumer spending accounts for around 20 percent of world gross domestic product.

But here is another situation where the United States is spending more than it makes. The current account deficit -- the gap in the United States' trade in goods and services with the rest of the world -- has risen to about 5 percent of the total economy. That's as high as it's ever been. The chart of the current account gap as a percentage of GDP, incidentally, looks almost exactly like a chart of consumer credit as a percentage of income.

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So the world economy is leveraged to the U.S. consumer. And the U.S. consumer is leveraged to the hilt. There are now more registered cars on the road in the United States than there are licensed drivers. America's energy needs, per capita, are nearly twice that of Great Britain's. At some point the U.S. consumer's creditors -- which is to say the rest of the world -- may have second thoughts about how their money is being used. Kasriel compares it to a corporation that uses its stock and bond proceeds to throw big parties, rather than invest them in its future.

Clearly something has to give.

"Nobody can pinpoint when this process will come to an end," said Carlos Asilis, a portfolio manager with the hedge fund Vega Capital Management. "But it is very clear that it can't go on forever. Do you let this bubble grow, or do you do something about it?"

There are signs that U.S. policy-makers are at least partially trying to address the problem, pressing Japan, China and other Asian exporters to let their currencies strengthen against the dollar. This would, they believe, reduce consumer expenditures on imported goods and fuel export growth as well.

But it might not solve the problem of consumers who are continuing, in effect, to eat their seed corn. It would take a powerful disincentive, like a Fed rate hike, to get people to stop spending and start paying down debt and save more. But to do that would be to court the forces of recession.

"We have a Fed that wants a booming economy, but the only way the consumer can continue to fuel the economy is through continued debt accumulation," said Rosenberg. "I don't know if there's an easy way out."

[ra]

I'm not.  I started pinching pennies in 1999 in anticipation of bad things.

[LePaul]

I recently mopped up and cleaned up my credit house...I had 2 old phone bills, an old pager bill and a Dr bill that somehow never made it to the insurance claims office.  All clear now, car paid for and even a little bit in savings.

When I shared my story about cleaning up what I'd found in my report, my friends were telling me about their credit card debt....yeeks!  $3000, one has almost $8k....good grief!

That's one thing I wish they taught in high school...managing money, credit and saving for he future.  When those pre approved cards showed up, they were great for buying...but it took a long time to finally pay them off!

[nuchpatrick]

Well, I guess if you mean me buying my new home I guess so Rip.  But the way things are now I'll be paying less for for my new home then when I bough my first home when I was 23. But, since I had no real credit I'm paying a high rate. Now, since I've owned my home for 4 years. I can now get a much lower interest rate. So now I can get a larger home(2100 sqft), with a nice garage. For what I'm paying now for a 1000sqft home now.

But, since I bought my old home I've remodled it and will turn a 40K proffit on it. So I'll have a nice 6 month grace incase the watermelon hits the fan so to speak.

[Ripsnort]

nuch, I don't think houses are part of consumer debt. They'd be considered an investment since you rarely sell a house for less than what you paid.

[gofaster]

Doesn't it seem like these types of stories come out a couple of months before the big Christmas shopping sprees hit?

Only 72 days/2 credit card billing cycles to Christmas.

[TPIguy]

25 and no debt whatsoever here. But then everything I own is crap. Paid for crap, but still crap.

[capt. apathy]

no debt here, no credit either.  1 credit card (secured, so I can't go into debt on it but can use it when traveling).

I've always had this absurd notion that you should earn your money before you spend it.

[DiabloTX]

Originally posted by capt. apathy
I've always had this absurd notion that you should earn your money before you spend it.

Everyone please forward this to your local Democrat, its so simple even they may understand it.  Maybe.

[Montezuma]

Just wait until Bush signs the new bankruptcy law that the credit card companies wrote.

[Ripsnort]

Originally posted by Montezuma
Just wait until Bush signs the new bankruptcy law that the credit card companies wrote.

Oh, the one where you'd actually be RESPONSIBLE for your overspending actions? Yah, we'd hate to make people actually responsible for stupid decisions.

[FUNKED1]

It's supply and demand.  Rates go down, people will borrow more.  Rates go up, people will bust bellybutton to pay debt.  If lots of people borrow more than they can pay, lenders will raise rates to cover increased risk, and the problem will solve itself.

[gofaster]

Originally posted by capt. apathy
I've always had this absurd notion that you should earn your money before you spend it.

How many times did you haul your laundry up to the laundromat before deciding "That's it.  I'm buying my own washer and dryer!".  

You pay cash for your furniture, too?

Homeownership and buying big-ticket items on credit go hand in hand.

[FUNKED1]

Originally posted by ra
I'm not.  I started pinching pennies in 1999 in anticipation of bad things.

I started borrowing in 1999 when I got LAID OFF due to a STOCK CRASH caused by CLINTON'S POLICIES.  

[capt. apathy]

Everyone please forward this to your local Democrat, its so simple even they may understand it. Maybe.

you're kidding right?  since we have had a republican ran gov't our deficit has been steadily growing.

this year we will spend $455 billion more than we take in.

From http://www.msnbc.com/news/940556.asp -------------
this years federal budget defficit is suposed to be the worst since 1992, when messured as a percentage of the nations gross domestic product. no improvement is expected until fiscal 2005, according to bush administration projections.

well he's got it back to where daddy left it.  even there own projections say it won't get better until 2005 (I guess they are expecting us to vote him out in 2004 and get someone in there who can handle it)

and how did these tax cuts get us an extra 87 billion to spend in Iraq?