Today's Opinions, Tomorrow's Reality 

House of Cards
The Collapse of Credit-Driven Spending

By David G. Young

Washington DC, November 27, 2007 --  

Americans won't stop their irresponsible spending on credit until an economic crisis makes them. That may happen sooner rather than later.

With the American economy teetering on the edge of recession, housing values dropping for a second year in a row, the American dollar at record lows, and oil prices hovering near $100 per barrel, Americans are stepping up to do what's expected of them in tough times: They're spending money at record levels.

Yes, the perennially irresponsible American consumer didn't disappoint on the busiest shopping day of the year. Sales on the Friday after Thanksgiving were up 8.3 percent from a year earlier.1 Nor were necessities high on consumers' shopping lists this season. Electronics retailers like Best Buy and Circuit City reported strong sales of such big ticket frivolous items as high definition televisions (because spending thousands of dollars to see the wrinkles of celebrities' faces is apparently popular), and many stores sold out of GPS Systems (which give drivers fancy visible maps and audible directions that they can show off, but don't really need).2

To the extent that these purchases were made in full knowledge of current economic conditions, it is unfathomable. Consumer spending has been driving America's economy for years, with many people living well beyond their means. Household debt as a percentage of annual disposable income hit a record 130 percent last year, up sharply form the 90 percent mark 10 years ago.3 The consumer spending binge that built up this debt was made possible by rising housing prices -- Americans could retire their credit card debt into their mortgages as they refinanced their ever-appreciating homes during the housing bubble.

But those days are now over. Home prices have fallen about 8 percent in inflation adjusted terms since the peak of the housing bubble, and analysts expect prices to drop 10 percent or more over the next year or so. 4 Meanwhile, the defaults that have been rocking the sub-prime mortgage market have only begun as time bomb balloon payments and higher interest rates have just started to kick in.

While home prices once fueled the growth in credit card debt, it is now credit card debt that is throwing fuel on the fire of home foreclosures. That's thanks to a two-year-old change in bankruptcy law. Back in 2005, banks lobbied hard for a law to make it more difficult for Americans to wipe out their credit card debts by filing for bankruptcy. As a result, large numbers of cash-strapped consumers have been choosing to pay their credit card bills instead of their mortgages.5

Despite such drastic actions, average credit card debt has not been going down. Revolving consumer debt reached a record $920 billion in September of this year6 -- about $8000 per household. And judging by Americans' continued spendthrift ways this holiday season, it looks set to rise further still.

This madness cannot continue much longer. Spending on credit has long helped the banking and retail sectors prosper, adding growth to the economy as a whole. But the system that keeps this going is nothing but a house of cards.

The very real risk is that the first sign of job losses will make it impossible for distressed debtors to keep up with their card payments, forcing the credit card industry to write down their debts in a pattern similar to that which has caused the stocks of mortgage companies to plummet. This will cause job losses in the banking industry, credit cutbacks, a reduction in consumer spending, and further job losses in the retail sector. This vicious circle could turn a mild recession into a financial crisis far more severe than that which has already hit the mortgage industry.

Could this crisis be the event that causes the chickens to come home to roost for Americans' unsustainable spendthrift ways? Perhaps so. Those who welcome strong Christmas sales as a means of avoiding recession are penny wise and pound foolish. The longer the madness of Americans' irresponsible spending continues, the larger the economic pain will be when it finally and inevitably ends.

Related Web Columns:

Victimized by an Idiotic Mob, October 2, 2007

Partners in Crime
The Fundamental Cause of Identity Theft
, June 21, 2005

Spending Away the Dollar, December 7, 2004


1. Reuters, US Retailers Enjoy Strong Start to Shopping Season, November 24, 2007

2. Business Week, A Big Black Friday for Electronics Stores, November 26, 2007

3. Economist, Getting Worried Downtown, November 17, 2007

4. Ibid.

5. Bloomberg News, Bankruptcy Law Backfires as Foreclosures Offset Gains, November 8, 2007

6. Federal Reserve, Federal Reserve Statistical Release G.19: Consumer Credit, November 7, 2007