Chapter One – WHY THE DEBT CRISIS?
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The entire world is in debt. Governments and nations routinely overspend. States, towns and municipalities are also plagued by ever-increasing budget shortfalls—“deficits.” Just looking at the state of California’s fiscal mess—a current estimated $35 billion sea of red ink—reveals the wide scope of this problem.
To please their constituents, many government leaders take the stance of “pork barrel spending”—catering to special interest groups who demand programs that benefit their own agendas. Such leaders are virtually compelled to overspend.
People’s personal lives also demonstrate this pattern!
Of course, instead of curtailing spending, governments simply raise taxes when theyoverspend. However, people cannot as easily increase their income.
Millions are being robbed of their financial security. Their families’ stability is crumbling away, and with it the future of their children. The cause?—DEBT. The toll this has now taken on society can only be described as acrisis!
Why? What is it that consumes so many with the urge to charge purchases?
Why do so many live beyond their means—requiring loans and credit cards to survive—thus fueling the credit industry? Consider the following:
• 50 million credit cards are issued each year.
• Up to 25 million people in America are “two paychecks from the street,” with nearly 15 million just “one paycheck from the street.”
• The average American carries a cumulative credit card balance of $8,562.
• The average family has 10 credit cards.
• 78% of Americans are considered “credit worthy” by the lending industry.
• In 2001, Americans paid over $50 billion in finance charges to creditors.
• Currently, the total consumer debt for Americans is a record $735 billion.
• An average minimal payment is 90% interest and 10% principal.
• There were 1.354 million bankruptcies in 1999 alone.
• In 2001, 1.5 million credit card holders declared bankruptcy—higher than any point in history.
• Almost half of all American households find it difficult to make their monthly payments, and consider bankruptcy a safe option.
• BusinessWeek reports that total household debt—car loans, mortgage, school loans, etc.—passed 100% of the household’s total annual income.
• In the United Kingdom, the average debt per household is £10,700 (GBP)—over $17,000 (USD).
• A Datamonitor’s Consumer Review 2002 study shows that now, more than ever, people are willing to buy unaffordable prestigious gifts, simply because they can slowly pay for them.
How many of these statistics include you? Have you found yourself making the minimal payments month after month? Have you paid off a car note or mortgage payment with credit cards? Have you found yourself making purchases you knew you could not afford, but just had to make? If you are an average American, the answer is yes. And, unless drastic action is taken, bankruptcy may one day seem like a healthy alternative for you.
Now for the real question: How can one get out of this dilemma?
Contents
Campaign for Debt
One of the most common phrases used throughout the holiday season is “Charge it!” Many millions of shoppers utter these same two words each year as they parade through crowded malls and stores in search of holiday bargains. With increasing prices, and an ever-expanding list of family and friends for which to buy, more and more consumers are being herded toward credit card bills and interest charges—all wrapped under the convenient “bow” of “buy-now-pay-later” merchandising. One month after the festivities and merry-making has ceased, buyers must contend with how and when to pay for their purchases.
With so many already in debt, the lending industry is turning more of its attention on younger customers.
On university and college campuses, creditors are commonly found swarming students with credit offers. For a free t-shirt or CD case, thousands sign up for credit, and begin their path down the dangerous slope of debt.
A Georgetown University study showed that 78% of undergraduates had acquired at least one credit card, with 32% having four or more. The average debt for these students was close to $3,000, with 10% owing over $7,000. Appealing to youths’ desire to have the latest clothes, music and cell phones, lenders practically guarantee that young cardholders become lifelong debtors.
The lending industry’s strategy is best described as marketing bombardment, and is a key reason that their profits have soared nearly 50% in just two years—and are at a five-year peak! With each credit company continually jockeying and vying to be the biggest, their target audience is any adult with a pen in hand.
This marketing is best portrayed through the media. Commercials, television programs, music and movies depict people on the peak of trends—enjoying the best of the best—as being happy, content and fulfilled. (Of course, to the average American, it would practically take an additional full-time job to stay on top of the heavy payback that follows.)
While one should always seek to have the best he can afford, this subtle merchandising has helped spawn a generation conditioned—trained—to SHOP! It is no wonder that 93% of American teenage girls reported that shopping is their favorite activity. The “buy-now-pay-later” mentality provides many with the justification to support this “hobby”!
This is dangerous thinking. Little does society in general realize the hazards of unchecked credit spending. Most will spend years trying to pay off mountains of debt that only took moments to incur. In reality, the buy-now, pay-later mentality is better described as “buy-now, agonize-later”!
Aside from selective age-based advertising, creditors are also taking a bold step with their merchandising. Think about it. How many times have you received a solicitation in the mail for “pre-approved” credit? How many of these offered “special introductory rates,” “low monthly APR,” “free application gifts,” “everyone gets approved,” “no payments for three months,” “an extra 10% off your purchase,” etc.?
Studies show that the average American receives seven or more offers from credit card companies each year! And this is only the beginning. These ads are more commonly sent to families (those who would naturally have more people to shop for) and those with a bad credit history (those who have already established that they have problems controlling credit spending).
Credit solicited by mail comprises nearly three-quarters of all accounts opened. These campaigns have been so successful, that they have more than doubled since 1993—when 1.52 billion solicitations were sent to Americans. In 2002, 3.3 billion were mailed. Many are often fooled into believing they have a good credit rating, simply because they receive these offers. It is logical to think that if lenders are offering you credit, it is because they trust that you can and will pay for it.
But this is far from the truth.
While offers are sent to those with good and bad credit, they are more often sent to those with bad credit—in hopes of further proliferation of debt. The reasoning behind this is that if the applicant has already fallen into the pattern of making unwise charges, meanwhile paying high interest, he will continue to do so. In addition, any who have recently declared bankruptcy cannot do so again for at least seven more years!
In a move to better “checkmate” their clientele, aside from increased marketing, the lending industry has also been vigorously pushing at Congress to pass tougher restrictions through bankruptcy legislation. Travis Plunkett, the legislative director of the Consumer Federation of America, stated, “Credit card issuers are brazenly lobbying for new bankruptcy restrictions at the same time their aggressive marketing and lending practices are pushing many families closer to the financial brink. While the issuers urge Congress to deny families access to bankruptcy…their profits are soaring” (emphasis ours).
The creditors’ dual attack—to protect and ensure their increasing profits—shows the cunning subtlety behind this billion-dollar industry!
Now, instead of asking, “What’s in your wallet?” as a major creditor asks in its advertising campaigns, one should ask, “How much of what’s in my wallet is actually mine?” After examining the facts, it becomes more apparent how consumed—and entrenched—in debt society has become!
Debt on the World Scene
The world, in many ways, is tightly woven together. Although competition, disagreements, disputes and wars commonly occur between nations, each nation is like a strand interwoven into a gianteconomic fabric.
Try to think of one entirely self-contained nation. For the most part, each country on earth isdependent on another—even multiple nations—for survival. The actions of each directly or indirectly affect all the strands. An example of this was U.S. oil prices forging to two-year highs becauseVenezuelan oil workers pledged to a 25-day strike, for the removal of Venezuela’s president in 2002-03.
In the world of finance, borders and territories are not as defined as they are on maps!
What about national debt around the world? How have countries managed their finances? Surely, governments and officials, with all their resources and means, have found a way to lower unnecessary spending, thus curtailing debt—right? The answers are surprising.
Space does not permit the inclusion of the debt of all nations. However, notice some general national statistics:
Asia and South Pacific Islands: With $139 billion (USD) in foreign debt and a crippling economic crisis, Indonesia is described as “a ship that has almost sunk.” Other issues, such as three decades of mismanaged funds, environmental concerns and social problems, add to Indonesia’s woes. Japan, with the second largest economy in the world, has a national debt of $5.3 trillion—140% of its gross domestic product (GDP – the final value of all goods and services produced in an economy in a given year). Although U.S. debt is greater, this percentage makes Japan the worst industrialized debtor nation.
Europe: In Italy, the national debt is over $1.4 trillion, and it is rising 7% a year. Although the EU only accepts countries whose budget deficit is less than 3% of its GDP, Italy—which has a deficit of over 100%—was made an exception. In the U.K., the national debt is $461.3 billion—with its citizens owing $33.6 billion in credit card bills.
North America: The U.S. national debt is at $6.3 trillion, requiring annual interest payments in the hundreds of billions! With an established limit of $6.4 trillion, the Treasury approached Congress in December 2002, asking for approval on increasing this limit. Because the national debt has increased $1.15 billion per day since September 11, this set limit was surpassed by February 2003. With the U.S. population estimated at 290 million, each citizen’s average share of this debt is over $20K! In Canada, the national debt is $600 billion—the second largest debt behind Italy, in comparison to the size of its economy.
Countries in Africa, South and Central America and the Caribbean are also reeling from debt problems, and often cut back in health services or other vital areas of government funding simply to make their payments!
These figures, along with the ever-increasing threats of terrorism, war, geopolitical struggles, lowered trade, crashing investments, poverty—such as the astounding 1.2 billion people worldwide living in absolute poverty (on less than $1 a day)—and other factors directly affect national debt.
After examining debt on the world scene, it is evident that the global economic “fabric” is riddled withdebt! No one knows just how to keep the global economy from sinking into a sea of credit woes.
On both the consumer and national levels, man has once again proven his inability to stem the snowballing burden of debt.
Consumer Debt: Did You Know?
Consider some additional debt facts:
• Industry watchers estimate that by 2006, about 30% of all consumer spending will be on credit cards.
• The average credit line is $3,500. A decade ago, it was $1,800.
• If you make the minimum monthly payment on a balance of $4,000, with an 18% annual rate, it would take you 42 years to pay it off!
• Identity theft and fraud have reached epidemic levels—even finding their way inside families! It is becoming more common to hear cases of teens, upon applying for credit, discovering that their parents have used their identity to have multiple lines of credit!
• Only 32% of parents regularly talk to their children about financial matters (“2001 High School Financial Literacy,” National Foundation for Credit Counseling News).
• In 1973, U.S. households saved 8.6% of their income to a savings account. In 1990, the typical U.S. household saved 7.8% of its income. In 1993, it dropped to 4.2%. Today, the average household spends 0.1% more than it actually earns!
Identifying the True Source of the PROBLEM
Before continuing, realize that not all credit is wrong. In fact, credit is an important part of life, to be used cautiously and sensibly. Through loans and developing good credit, people can buy their first car, home or apartment, or put themselves through college.
Credit is not the problem. A lack of self-control drives many into irreparable debt—even bankruptcy. The reckless, impulsive mentality behind most borrowing has turned the loan industry into a thriving business. Credit is often used to purchase luxuries, leaving little to show for it except the bills. As a finance reporter for BBC News stated, “The temptation to borrow too much is greater than ever before.”
Obsession with material goods further fuels the ever-growing debt crisis. In order to have more, people today spend more than they actually make. They are accustomed to increasingly luxurious lifestyles, feeling the need to spend more—to have the best clothes, newest gadgets and fanciest cars—the “keeping up with the Joneses” mentality. They are further driven by the rationale, “Everyone else is doing it!”
Many have the tendency to shop when feeling unhappy or discouraged in order to feel “better.” Ironically, much of their initial unhappiness and worry stem from debt. So the cycle continues.
WHY? As governments and their citizens slip into bankruptcy, why has man not found a way to curb his appetite for material gain and manage his finances?
Author John Steinbeck wrote, “If I wanted to destroy a nation, I would give it too much and I would have it on its knees, miserable, greedy and sick…We can stand anything…save only plenty.” These sobering words should serve as a warning to any nation currently in this condition. The U.S.—certainly the richest nation in the world—is far from rich in character and personal responsibility for its affairs. As Alfred Hackbarth, of the National Foundation for Consumer Credit, explained, “There is a breakdown in personal responsibility.”
This is true of society today. Most are so busy living for the sole purpose of pleasure, comfort, gain and entertainment that personal responsibility and character-building are not as important as they once were. This present generation is very different from a few generations ago.
News headlines of credit fraud, identity theft, corrupt and failing governments, increasing corporate and consumer bankruptcies and others are telltale signs of the miserable, greedy and sick state of this debt-ridden society!
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