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(* that is, the 99 per cent.)
I was there when a furniture-store owner I’ll call Chuck introduced, to a certain British-ruled, sub-tropical, behind-the-times island, the concept of hire-purchase — or, in American, rent-to-own. He started selling furniture on credit, for a small down payment and a contract to repay the balance at an astronomical interest rate. His policy scandalized everyone on the island who was rich enough not to need credit for such purposes; and was insanely popular with everyone else.
The establishment railed against what he was doing as somehow immoral, even illegal. Some legislators tried to declare it, and ban it, as “usury” (a quaint, antique sin, now regarded as about as serious as not eating fish on Friday). They decried hire purchase as a practice that would corrupt the moral fiber of poor people, which they seemed to think was somehow improved by not having furniture. They did not feel, however, that the large mortgages they held on their villas had in any way corrupted them. Things did not go as easy as a check over here that gave every information required. The poor need to be educated about mortgages and credit.
Despite their disdain, the lower classes got their tables and chairs and Chuck got very rich indeed and was soon a welcome guest in the homes of the island’s rich and famous.
It was hard to follow or to credit the arguments against selling products on credit. Indeed, the upper classes — on the island as elsewhere in the world — soon abandoned all compunctions about selling on credit when they realized that selling things to people who could not afford them made them and their bankers, obscenely rich.
Since the innocent days of yesteryear, when having a mortgage was embarrassing, borrowing money was evidence of a character flaw and declaring or filing bankruptcy with the help of bankruptcy-focued lawyers was the secular equivalent of eternal damnation, debt in America has become a vast cancerous growth that now threatens the very life of its host. Let’s set aside for now the scary dimensions of public debt (now $19 trillion and rising) and corporate debt (over $14 trillion and rising) , and focus just on the debt of individual Americans (now over $12 trillion).
Total individual debt is almost back to where it was in late 2008 when the Great Recession began. For five years after the last crash it declined, not because people were paying their debts but because foreclosures and bankruptcies were obliterating them. The number of bankruptcy cases that reach chapter 13 bankruptcy attorney in Philladelphia is proof. Since 2013 overall debt has been increasing again, but changing in nature.
According to the Federal Reserve Bank of New York’s latest consumer credit report, about 70% of individual debt is for housing (mortgages and revolving debt), and about 10% each for auto loans, student loans and credit-card debt (when you include the “other” category with with credit-card debt). Until the onset of the last recession, each of these categories increased in tandem. Since the recession, two of the categories of debt — housing and credit-card — have been steadily decreasing. The other two have been skyrocketing — student loans without pause and auto loans since 2011.
The characteristics and trends of debt are markedly different among people under 40, and over 40, years of age. And therefore, the solutions differ from help filing for ch 12 and others. In the past 12 years, the aggregate debt of those under 40 has fallen by 12%, while that of their elders has risen by 169%.
The components of debt are markedly different as well. The average 30-year-old has seen his mortgage debt decline by $8,000 (because he can’t afford a house, which is bad news for the economy); his credit-card debt reduced by $1,000 (because he’s wising up about that) and his auto-loan balance down by $300 (because young people are losing their lust for cars). He’d be in really good shape if it wasn’t for the $7,000 increase in his student-loan debt.
Meanwhile, the average senior is in worse shape than ever before. Her mortgage debt has increased by $11,000, her car-loan balance by $1,000 and — incredibly — the average student loan balance for people over 65 is up $850 per capita. That’s a nearly 900% increase in 12 years.
With the debt of young people declining because they can’t afford to buy anything, and the debt of elderly people increasing as they approach the end of their earning years and thus the ability to pay their debts, debt has become both an enormous threat to the welfare of families and a huge drag on the economy.
Remember the old fogeys on the island who accused my friend Chuck of doing something immoral when he enticed people to buy things they could not afford with a promise instead of cash? They sounded silly then. They don’t sound so silly now.
Debt via usury [how the Catholic Church changed its stance on this, i still don’t understand] is indeed pervasive and an economy killer (in the same way our industrial civilization is killing our biosphere and thus removing the very habitat we need to survive). It’s all supported by (actually DRIVEN by) the ad agencies and main stream media, which entices people toward behaviors that are actually not in their best interest.
For example, in education (where i’m employed) people with no means are given loans to go to college, yet they need remedial work (with no college credit) in BASIC elementary education just to be given the CHANCE to succeed and graduate. These people are led to believe that they will advance to graduation and a “good job” in some field like medicine, dentistry, veterinary medicine and such, but rarely meet the standards and by and large drop out – LOADED WITH DEBT – before their “dream” is realized. Enrollment has counter-intuitively INCREASED over the past 5 years, while i’ve been waiting for it to implode, as it must, sooner or later.
Thanks again for your insight and analysis Mr. Lewis.
It is possible to use debt to your advantage in the collapse. For instance, if you buy cheap rural land off grid at low priced paid off soon as in six months ( paid off at the amount you would be paying rent ), and finance a car to commute to work from the land ( where you are building a cabin cash on the barrelhead ), once you lose your job you repo the car and still own a paid for no mortgage home. E-Bay land offers low down owner financed, BTW. Other than that, I’d avoid all debt as we will mostly all be losing our jobs very shortly.
I don’t understand why anyone worries about being in debt at all after collapse. Who is going to enforce debt obligations after the banks are all closed down and their are no courts or police? If you’re confidence in collapse, load up on debt for the things you’re going to need and then let it ride. Is there a flaw in this argument?
Only one. You have to be very sure collapse is coming before your debt is due.
You are assuming a complete and total breakdown of society. This may not be the case. In any event, the banks will forget your deposits but they will not forget your debts, and given their power over government, can and will change the laws to suit their ends. Debts could find themselves fugitives, and once caught, sold into debt slavery. I seriously considered your position on this issue and decided it was better to be debt free here and now than to take that chance. The system has already survived longer than most of us who follow this topic thought it would.
I would offer a second flaw. If collapse is sudden and complete, and as Tom points out, your timing is perfect, then sure you’re out of the debt woods when collapse happens. If instead we have the historically more common slow crumbling, then you might find yourself in debtor prison as is beginning to happen to some in Texas unable to make student loan payments. Remember, the private for profit prison system is looking for inmates/workers all the time and if you examine the 13th Amendment you’ll find it does not protect ‘criminals’ from slavery, they are specifically excluded.
For the record: the man in Texas who claimed (on Fox News) to have been arrested for not paying a student loan he “didn’t know he had” is a scofflaw who was successfully sued in civil court in 2007 and repeatedly refused summonses to appear. Failure to obey an order of the court is a crime. When US Marshals did finally arrest him, for failure to appear, they took him to court where, once his appearance was over, he was promptly released.
http://finance.yahoo.com/news/paul-aker-us-marshal-student-loan-debt-arrest-212047386.html
It is a deep irony of our times that three crimes that were once the despised work of gangsters; gambling, loan sharking and drug dealing have been rebranded as gaming, finance and health care and are the trade of a presidential candidate, the paying audience of another and of the solicited contributors to most.
It’s funny (in a terribly sad way) how we mock our ancestors – see them as silly, but when you consider that EVERY* religious/cultural tradition has banned Usery as a crime and an abomination for the exact reason that it ends up with a few people owning all the chips maybe we should have listened.
* The exception of course is the Jewish but even they banned it between themselves – you could only use Usery on the goyim.
Our consumer based market economy is debt driven. Debt allows one to partake in unearned riches but it drives the economy by giving fuel to the economic machine. The now dead protestant work ethic was a balance between the morally sanctioned drive to acquire as much as one could through work and a commitment to restraint by only consuming within ones means.
Consumerism threw off the chains or restraint and broke the protestant work ethic in half when restraint was thrown away as a virtue. The legacy of consumerism goes back to the 1920’s.
The problem was that the protestant ethic of restraint was not a chain but necessary behavior to live in our world of limits in a rational way. Mortgages are a special case of debt as homes are so expensive they are earned while they are used. If homes had to be earned before they are used many people would not have homes and could not earn anything at all. Not all debt is bad but it must be used with restraint or it cannot possibly be good.
The religion of consumerism sealed our fate and doomed us to misery because it ignored the problem of dwindling resources and environmental catastrophe in a relentless demand for resources. Losing touch with the natural universal order the religion of consumerism demanded one believe and embrace the notion of infinite growth as the means to wash out the stain of debt which is necessary to keep infinite growth fuelled.
That the inmates are running the asylum is an often used term because it is so often true. Politicians have made decisions which other men knew to be wrong which has doomed our later generations to extinction. There were individuals in the 1920’s who understood what consumerism would do to the country but the inmates ignored them. Unlimited consumption and growth was declared a virtue and our demise is the result. Had not debt allowed people to live beyond their means jobs would not have been allowed to be exported in a global economy because the ability to earn would have received the attention it deserved.
The best thing Americans can do is avoid debt and consume less to mitigate the coming and inevitable economic collapse.