A Nation of Debtors

American’s have one of the highest standards of living in the world. We have nice cars, big screen televisions, comfortable houses, a closet full of clothes, three square meals a day, and on and on. We don’t actually have these things in equal proportions; in fact, there are millions in this country who go without many of the things most of us take for granted, like a warm meal or an extra pair of socks. But the greater numbers of Americans enjoy a quality of life that is exponentially greater than the vast majority of the rest of the world. Most of this success is due to the ingenuity of the citizens themselves, their hard work and dedication. Some of it is due to our capitalistic economy that allows and fosters innovation through competition and financial reward. But another factor, the silent partner if you will, is the establishment of the credit industry.

Although the use of credit is nearly ubiquitous in today’s world, there was a time not too long ago when there were no such things as credit cards or debit cards. For a few big-ticket items, like a home or a car, a person could get a loan through their bank. For most other things though, if you wanted to buy something you had to have the money to pay for it then and there. Occasionally, “accounts” could be set up between merchants and consumers, but rather than being an organized program for all consumers, such arrangements were made on a case by case basis between friends or frequent associates. In those days, the average American’s standard of living was much more closely aligned with the rest of the world, though still faring a little better because of the industrial base and individual commitment.

Then, along came the credit card. This wonderful piece of plastic, embossed with a person’s name and account number, would revolutionize the way we lived and bought things, raising our material wealth, and as a result our standard of living, by introducing the concept of buying on time. With the credit card, a person could purchase that new washing machine now and pay for it over a whole year, making it less important to save for things, but more important to have a steady influx of cash. Still, by spreading out the total cost of an item, the monthly payment might allow the purchase of several big things, with a combined monthly cost less than that of buying a single item outright.

Flash forward 50+ years to today and the result of the credit industry is a national standard of living that looks good in person, but on paper it’s an accident waiting to happen. The average American has 7.6 credit cards in their wallet. (Store cards, gas cards, bankcards, etc.) The average household credit card debt is around $8,000. 43% of Americans spend more money than they earn each year, and as a whole, for every dollar we make we spend $1.22. We may be driving new cars and wearing designer perfumes, but the truth is that much of what we “have’” isn’t really ours yet because we’re still paying for it on a monthly basis.

So what went wrong? On the face of it, credit seems like a fantastic economic concept. By increasing spending power, you can increase production. Increased production creates increased business profits, which beget an increase in tax revenue. Seems to be win-win all the way around. And as long as everyone makes their payments on time, everything works out fine. But just because it looks simple and sounds simple doesn’t mean it is simple. Although credit makes things more affordable by spreading out the cost over time, buying on credit costs more than buying something with cash. It costs more because the person (or company) extending the credit charges you a fee for the privilege of paying over time. Behind the glowing promise of materialistic satisfaction lies the business end of the credit industry: interest payments. This is where people get themselves into trouble, and it is what the credit industry thrives on.

Using credit so that it benefits your life is a learned skill, but unfortunately it isn’t one that is taught to us as young adults. Instead, most of us learn about credit the hard way- through trial and error. It starts about the time we graduate from high school and we receive our first credit card opportunities through a bank or department store. Usually, the first cards are the easiest to get and they offer a low credit limit and a high interest rate. For the first time user, the concept that spending $200 you don’t have and ending up paying $300 for it doesn’t compute with a $10 monthly minimum payment. And without prior education, the thrill of having what you want when you want it is more than many 18 to 20 year olds can handle. Soon, they find themselves with several credit cards and increasingly higher minimum payments. Then they realize that their minimum payments aren’t reducing their balances and discover that they are barely paying the accrued interest each month. A missed payment bumps up the interest rates and triggers late fees and/or over limit fees. The balance increases and the trouble compounds from there. At the same time, a negative credit report is being built, making it harder and more expensive to get credit in the future for something more important than a new jacket or the latest home video game system. But by the time this is realized, the damage is done.

How much of this personal financial meltdown is the fault of the credit company and how much is the fault of the person? Certainly, credit card companies don’t force anyone to spend more than they can afford. But they certainly encourage it and actively seek as many possible customers as they can get, whether that person can afford the credit being offered or not. And while some credit companies seek only those customers for whom credit is a convenience, many others actively seek out those with marginal incomes who are often more in need of ready cash flow and less likely to take the time to understand the punitive details or the credit agreement. The result is a person indefinitely tied to their credit card balances, behind in payments, and unable to make ends meet or get ahead, and an increase in personal bankruptcies. Credit, instead of being the financial fairy godmother for families, becomes like a mafia loan shark waiting to take a bite.

Credit problems aren’t unique to individuals though. Companies small and large depend on credit for their day-to-day operations. Government carries the largest debt balance of anyone, which almost begs the question of who’s copying whom. It’s as if living beyond one’s means is the norm, and is not only expected to occur, but it’s considered downright odd not to be in debt to many different lenders at the same time.
Credit requires responsibility, trust, and rational expectations, both from those requesting credit and those granting it. Since the credit industry is a business, it has a right to generate a modest profit for itself. It is after all providing a service and helping to stimulate economic growth. But a society steeped in debt is not a free society. It is a society in hock, an indentured civilization where the rich get richer at the expense of middle class desires.

What needs to change? First of all, we need to educate our children (and ourselves) about the use of credit, the penalties associated with credit, and the consequences of poor credit reports. Start personal finance education in the middle and high schools and make a basic understanding a requirement for graduation. After all, in the real world, more people need to know how to balance a checkbook that figure the volume of a cone. Secondly, restrict the blind credit solicitations from credit card companies. The predatory solicitation of credit card companies is like an avalanche in every mailbox. Not only are these unsolicited, non-stop credit offers needlessly wasting valuable trees through paper consumption, they are aimed at those least able to pay the monthly balance in full. Credit should be sought by an individual, not forced down their throat. Third, decrease or eliminate over-limit fees in favor of temporary account freezes. After all, the purpose of credit is not to go eternally in debt, but to facilitate needed purchases or to use in place of cash you already have in the bank. Fourth, eliminate the automatic rate increase so popular among today’s lenders. Why should a late payment trigger an increase in all a person’s accounts, even ones with a perfect payment history? The only reason for this is to profit from a persons temporary misfortune. Fifth, limit the maximum interest rates to 10% or less. This is still enough for credit companies to make great profits, but low enough to keep debt from spiraling too fast. Sixth, require consumer notification before adding negative credit information to a person’s credit report. This allows an individual to account for any missed payments or other potentially negative problems. Seventh, require credit counseling for individuals who have chronic credit problems. Eighth, require credit companies to extend no more credit than a person can reasonably manage, and require subsequent credit companies to extend no more than a certain combined total of disposable income. Ninth, increase privacy laws by prohibiting the sale of credit bureau information and restricting access to that information to only companies currently doing business with that person. Strict enforcement could also reduce a large number of identity thefts, something that is an ever-growing problem.

Adopting these changes could help release the stranglehold that credit companies have on so many families these days. And by ensuring that people could afford the credit extended them, the number of write-offs would probably decrease, saving the industry millions of dollars each year. Slightly tighter credit requirements would encourage more saving and less impulse spending, good for both individuals and government in the long run. (More saving- less dependence on government aid.) But in addition to reining in the practices of credit companies, we also need to teach and expect people to better manage their finances, and by extension, the government must better manage its finances as well. Because a nation of debtors is only as secure as those who hold the note allow them to be, and when you’re in debt over your head, it doesn’t take much to start drowning.

It’s The Economy, Stupid

Nothing puts a glaze into the eyes of average citizens quite like discussing economic theory. At best, it’s a confusing topic. Start injecting things like gross domestic product, prime interest rate, futures pricing, trade subsidies, and compound interest and you’ve pretty much lost most of your audience. But talk to the average person about money, and it’s a whole other ball game. Money, after all, makes the world go ‘round, or so they say. Everybody needs a way to earn money because nothing, except maybe the air we breathe, is free. Money, or a lack of it, shapes our lives in every imaginable way.

Growing up in a capitalistic society, we are raised to look at money as an end in itself rather than a means to an end. What I mean is, for most of us, the acquisition of money is what drives our lives. We need or want things that cost money, so we work to make money. We trade that money for things and then need more money to get more things. The more we have, the more we need. The more we need, the more we work. Capitalism requires a certain level of materialism to function properly, and we seem to have that down to a tee. But as our lives grow increasingly more dependant upon a steadily increasing flow of money, and as our materialistic tendencies increase with each new innovation, we slowly lose focus of what is really important in life and we instead turn all our energies into amassing as much money as we can (or as many things as we can, which can prove how much money we have or had.) Rather than spend our relatively short time on earth in harmony with each other and nature, we construct an adversarial environment that pits man against man with money right in the middle.

Of course, governments need money too, and as a result, we have taxes. Because government does not produce anything sellable (in theory at least) yet it is expected to provide many tangible and intangible things for the citizenry, the only source of money for the government (again, in theory) is taxes. The bright side of taxes, at least in a democratic society, is that their collection and use is supposed to provide for the common needs of the society, so you get back what you put in, in some manner or another. Unfortunately, the reality is often somewhat less than that. Too often, the people in government spend public tax dollars as if they had won the lottery, providing little oversight or accountability for the way those monies are spent. Such waste or abuse causes the average citizen to have to provide more tax dollars, making him earn less or work more. In addition to setting tax rates and spending tax dollars, government also creates legislation that causes more money to be drained from the everyday worker and into the pockets of the business industry, setting up an adversarial environment between man and the government.

And then there’s business. Provider of jobs (so people can earn money) and creator of goods or services (so people can spend money.) Friend of the politician (through political donations) and befriended in return (with tax subsidies and tailor-made regulation.) Business is the glue that holds the whole system together, but being in that position requires a greater level of trust and integrity than exists today. Part of the reason for the animosity between people and business stems from the mutual reliance each has on the other. We wish we didn’t have to work for a living and business wishes they didn’t have to pay us to work for a living, but as we can’t have one without the other, an uneasy truce exists. The other reason stems from the misguided notion that a business entity is the same as an individual, at least so far as the law is concerned. Businesses exist to provide jobs, goods, or services. They exist to generate money for the workers and money for the owners. But they are not thinking, breathing, sentient forms. Businesses are piles of paper and rooms of inventory. They have no need for food or shelter or health care. Yet government policies and regulations afford businesses many of the same rights that are afforded to individuals. As such, businesses (and those who head them) can affect social mores and agendas more readily than average citizens can simply because business has greater wealth resources than individuals do. An already adversarial environment just gets that much worse.

Underlying all this commotion though, is still the idea that money is an end in itself. And with that concept comes the tendency of people, government, and business alike to devise any scheme to get more than they are entitled to. Because in addition to satisfying our materialistic tendencies (which I believe are more ingrained than innate), money also carries with it an element of power or control. The more money a person has, the more control they have over their destiny or the things they want to have. The more money a business has, the more it can control its corner of the marketplace and the more power it has in the political sphere. The more money government has, the more it tries to spend it, usually on ill conceived plans, but just as often on things or in ways that the tax payer would not approve of. Too often, tax money just fades away or gets diverted while the original intended use is forgotten about. Yet government always wants, and has the power to get, more money than it needs. And all too often, business and government conspire to get more from the citizens, whether it is money or work or both.

The business of money is yet another area to consider. Banking, insurance, and investing are all aspects of our financial world that touch us each on some level, including government and businesses. Because money is so important in our world, entire industries evolved to help us manage, protect, and increase our own supply. In a not so surprising turn of events, these industries are among the most powerful “behind the scenes” forces that shape financial and economic legislation in ways that affect the daily lives of John and Jane Doe, sometimes for the good, often for the bad.

Money is important. There’s no getting around that. But is it the most important thing in life? Problems with money are often the main cause of family strife, business failure, or government corruption. For those who have little, it’s never enough. For those who have some, it’s never enough. And for those who have plenty, it’s still never enough. This is the prevailing attitude of the majority of people in our country, and the majority of businesses as well. The next several essays will talk about various economic issues, among them credit and bankruptcy, insurance, taxes, trade, saving money, business and labor, unions, and the consumer society we live in. I’m not an expert on economics, but I hope to take a fresh look at these necessary aspects of our world and throw in a little Common Sense where it’s needed. I hope you’ll join me.