Economic Crash Starting for Most Americans

January 14, 2006

The news from the consumer home front is bad and getting worse. New bankruptcy laws require consumers to pay off credit cards even during a bankruptcy and allows credit card companies to double the minimum payment, not that this will help much.

Going into the fall, consumer credit card balances were at record highs and were expected to increase as the Holidays approached. They indeed increased and inspired the Administration to tout the good retail sales as proof of a healthy economy.  Their lack of insight about the consumer debt problem appalling.

To make matters worse, consumers are still falling behind in payments, with past due accounts staying steady but at all time highs. Like the Administration, millions of consumers don't get it. Financial truths and the new bankruptcy laws of 2005 are about to descend on them and blithely spend even more.

Unfortunately, there is no longer a real connect between money and credit cards or debt in general. It is all just numbers on a bill or statement.

But wait, it gets worse.

Energy prices will produce more “stress” and this should come to a head this year when the realities of big energy bills meet up with higher minimum payments and even higher credit card interest rates. The result will not be pretty and even worse for homeowners who bought a home in the past three years at inflated prices.  House values will, at best stay the same or most likely drop. There could be millions with homes they can no longer afford and credit cards they can't pay down.

Many clueless economists say a “strong economy” will reduce financial stress, believing debtors will still be able to make their payments on cards and mortgages, if only barely. Don't count on it.

The American economy is based on voracious consumer spending using credit cards, personal loans and mortgages. This outstanding debt fuels retail sales and the housing market which, in turn, supports hundreds of thousands of jobs. This convergence of obligations and economic realities will soon cause a significant recession.

How much more can we squeeze the consumer and call it an economic success when they bleed to their last drop?

Unfortunately, our nation now relies on consumer debt to keep the economy afloat. In the past, our economy was based not only on consumer spending but things like national deficits and international trade balances. The last two are at record negative balances representing of the trillions of dollars of debt and the only bright spot for economic incompetents was consumer spending.

When that bright light dims, how will we fuel our economy?  Will America, collectively declare bankruptcy?