Americans cling to debt cliff

June 08, 1999|By Froma Harrop

THERE'S A late night commercial aimed at people who have something to worry about. A guy and his wife are in their nightwear. They are suffering from insomnia and agitation, like much of the audience watching television at 1 a.m.

It seems they have piles of bills, all unpaid. The couple hears about a mortgage that would allow them to borrow up to 125 percent of their home's value. They go for the loan and use the proceeds to pay off the other bills. Peace of mind restored, the couple can sleep again. They announce (heh, heh, heh) that their sex life is also much improved. They tuck in, seemingly oblivious to the fact that they no longer own their house.

Other ads flickering through the wee hours of TV land tout the services of bankruptcy lawyers, who offer to help viewers declare insolvency and walk away from their debt. Then there are the companies offering credit cards to people with terrible credit histories. These commercials might help debtors fall asleep, but they really ought to be keeping the people who run the American financial system wide awake.

Bankruptcy record

Americans are now in the eighth year of the strongest economy in recent memory, yet record numbers of us are filing for bankruptcy. Others struggle valiantly to juggle their debt; they manage to meet minimum monthly payments on credit cards charging sky-high interest rates. As long as jobs abound, the balls will stay in the air.

The only scarce economic commodity seems to be financial prudence. When ancient Egypt enjoyed bumper crops, the biblical Joseph stored surplus grain so that the people would have food when the harvest failed.

Why have Americans abandoned the practice of setting aside surplus money at times of plenty to tide them over during the lean years? Perhaps Americans don't believe that the good times are ever going to end. Or they don't want to believe it. Or there is indeed such a thing as an "addiction to shopping." Or perhaps buying things has become the antidote to a growing sense of depression, however temporary the relief.

The point is this: If large numbers of Americans are going financially belly-up in boom times, what's going to happen when the economy weakens? You don't really want to think about that because standing behind today's over-the-line deadbeats is an army of ordinary people who just make ends meet on a month-to-month basis. One little push of financial adversity -- a family illness, a lost job, an uninsured theft -- and they're over the edge.

The Commerce Department reports that in April, for the third month in a row, the personal savings rate dropped to a record low. Nowadays, Americans save about half as much as they did 30 years ago.

Paper assets

Some have argued that the Commerce Department figures exaggerate the poor savings rate because they do not include increases in the value of people's stock portfolios. That may be a valid point when referring to families that hold a substantial amount of stock. However, while the popular culture likes to portray America as a nation of shareholders, in truth, only a minority is actively tied into Wall Street. A mere four in ten Americans even own stock. Of that group, a rather large percentage have portfolios so small that they add little to family wealth.

Of course, many of the blessed few with major stock gains have accelerated their spending based only on paper profits. Should the market take a dive, the stock-owning family will still be responsible for making payments on its new 40,000-square-foot mansion, while the wealth upon which it confidently made the purchase is much shrunken. But these aren't the people we should be worrying about. For the most part, what they own will simply be worth less.

We should be worrying about the people who don't own anything, but think they do. We return to the late-night TV commercial couple who act and live like middle-class homeowners, based solely on their ability to borrow lots of money. The reality is they are so far into debt that they don't even own the termite holes on their house.

Unfortunately, there are an awful lot of people like them.

Froma Harrop is a Providence Journal editorial writer and columnist.

Pub Date: 6/08/99

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