Downward Spiral

The Asian financial crisis is creeping our way and the overblown bubble of the U.S. stock market is beginning to leak air. These stories are dominating mainstream economic news, but there's a more important one that impacts the majority of Americans, and it's being completely ignored: the personal debt spiral.

The amount of money that each U.S. citizen saves on average is lower than just about everywhere else in the world, and this year it's hitting an all-time record low. In 1982, the average American saved around nine percent of his/her income, but each year since then has shown a steady decrease. In 1997, the rate was only two percent, the lowest it's been since the 1930s. Those who do save are a minority: at least 59 percent of American households have seen no benefit from the over-inflated stock market, because they own no stock or other investments.

At the same time, personal debt and the personal bankruptcy rate have skyrocketed. Last year, 1.3 million people declared bankruptcy, which has led banks and credit card companies to lobby Congress to change the law regarding bankruptcy filings. The new bill would require you to demonstrate "need" in order to qualify for bankruptcy protection and get out from under the burden of credit card debt. Most people who currently qualify for bankruptcy protection would never qualify if the new law is passed; they would have to restructure their debt and continue paying and paying and paying ... and Americans owe a total of $425 billion in bank credit card debt. This number is rising fast.

Who's responsible for this fiasco? Well, for one thing, banks make their money from loaning out money to people and businesses; the fees and interest you pay on credit card debt go directly to them as income. In order to show steady growth, they need to continue extending credit to a wider group of people by hooking new folks in or raising the spending limits for current card holders. Some banks raise their limits every six months.

In recent years, many banks have loosened their credit standards--in other words, they'll now give a credit card to people with lower incomes or without steady employment, even though they know these people can't pay (and it's cruel to expect them to). At the same time, fees have gone up and most cards bear usurious interest rates, even when they advertise at very low temporary rates to hook you in. For example, if you charge $2,500 on an average credit card today and only pay the minimum balance every month, it could take you as long as 34 years to pay it off, including fees and high interest rates. If the bank keeps extending your line of credit and you use it, you may never pay it off, and you may start to get behind on even the minimum monthly payments.

During the deregulation of the banking industry (beginning in the late 1970s and continuing into the 1980s) interest rates were deregulated, too. This allowed banks to raise interest rates on cards and start fishing for new cardholders among the poor--people who are desperate and need more income. Banks justify rates as high as 16 to 18 percent because these high rates cover their losses when people declare bankruptcy, as they've been doing in record numbers. It's a continuous cycle.

Of those folks who declare bankruptcy, the demographics are exactly what you would expect from the scenario outlined above. Blacks, Latinos, and the poor make up a higher proportion of bankrupts, due mostly to job loss, medical debts, and divorce (especially for women). To quote Doug Henwood, publisher of the Left Business Observer: "Credit and indulgent bankruptcy laws partly substitute for a civilized welfare state--to the great pleasure and enrichment of creditors."

Obviously, people should cut up their cards and not use them, but even this is becoming more difficult. In June of this year, personal incomes rose only 0.2 percent while consumer spending rose 0.6 percent. Historically, average wages have stagnated throughout the 1980s and early 1990s, while corporate profits have soared. Small wage gains in the past year or two haven't made up for these losses in personal buying power, so people are using credit cards to pay for necessities.

Furthermore, for younger folks, the temptation to jump into debt is enormous. For the third year in a row, advertising revenues for U.S. companies are expected to grow faster here, inside the U.S., than anywhere else in the world--this puts the lie to the "global marketplace" mantra of big business. The U.S. market alone accounts for 45% of all advertising spending. In the U.S. we're continually harangued to buy more, while we steadily earn less and less at our jobs.

And so the cycle continues ... and becomes it's own best argument for a complete overhaul of the system.