Tuesday, February 8, 2011
Today's topic is personal debt and how it drives the US economy.
You would think our economy would be driven by other factors such as a manufacturing capacity which we used to possess in abuance, or invention and initiative in creating new products and technologies. Or perhaps it is our service sector that now provides the vast majority of US employment. They all play their specific roles in the overall maintenance and growth of GDP and such. But debt is the reason the US economy survives.
Think of it this way... let's say our economy was set up so that pretty much everyone received well paying jobs and with very few exceptions, homes, automobiles and other 'big ticket' items were at such an affordable price point, you didn't require debt to obtain. And lastly lets say the vast majority of people spent their money responsibly and did not willingly put themselves into debt by feeding the Id-- how would this affect the economy?
- The entire mortgage industry would virtually disappear. No need for mortgage lenders, brokers, etc. No more 15-30 year home loans resulting in borrower paying out 2-3x the price of their home purchasing price by the time it was paid off. No mortgages to bundle up and sell to investors for them to sell to others. No foreclosure business either- attorneys to represent banks and those you retained for protection, no sheriffs making money to issue eviction notices, etc...
- No more debt collection industry. Since pretty much everyone would own their homes outright, there's no ability to forclose or repossess. And since everyone could reasonably pay their bills, there'd be no one to collect from; no one to harrass by phone and mail on a constant basis. No one to file motions against and establish leins or garnish wages. There'd be no bankruptcies thus no bankruptcy court to profit off your predicament. Sheriff departments wouldn't be able to collect fees to serve summons to appear in court., bankruptcy attorneys wouldn't be needed to represent you, no court fees to collect, etc.
- Cities and municipalities would have their revenue dried up dramatically. The property taxes on a home purchased at $40k is much lower than what can be collected from a home purchased at $300k with 4% down and the rest mortgaged and spread out over 360 payments. All aspects of local life dependant upon property taxes would suffer- schools, police/fire depts, waste management, snow plowing, etc.
- No more banking system as we know it. Everyone pays bills on time because everyone makes good living at fair wages and thus does not have debt. So no need for mortgages, 2nd mortgages, car loans, student loans or any other debt instrument. There'd be no check-cashing stores since people would not be living paycheck to paycheck. No ads on TV offering $$ to borrow at APR that exceeds 400%. The number of people who work collectively in these fields would be slashed by 80-90%.
- Other businesses would be affected: Divorces would drop dramatically since #1 cause of marriages breaking up is money issues. So less need for divorce attorneys and all court related fees. Alcohol and drug usage would also dramatically decrease since both tend to be used by adults as coping mechanisms to escape the reality of economic misery. Casinos and state lottery would see their revenues fall precipitously. Why spend all day playing slots and scratching tickets, hoping you can make enough to pay the bills when pretty much any job will provide good wages to allow you to achieve the same goal?
So you see, the US economy needs its people to be indebted in order for it to function. The last thing it wants is poor people to no longer be poor. Or the middle class to be self-sustaining. It does not want genuine economic independence and prosperity for all. A few can be wealthy and that draws motivation for the rest of the populace to dream and have something to aspire to.
The economy survives only when people borrow money. The interest collected over time on debt keeps the entire banking apparatus alive which in turn allows Wall St to thrive. It also forces people to keep working that otherwise wouldn't do so if financially secure.
Think about the two 'stimulus' programs from the US government back in 2009 when the economy was in super bad shape (as compared to presently when its just in really bad shape).
First was 'Cash for Clunkers' where you took perfectly workable used cars that happened to just be old, traded it in towards a new car and received $4000 back. Of course the very least expensive car one can buy new is a sardine can with manual transmission and manual locks/windows for $10,999. So every person who traded in their car, drove off with fresh new debt to pay off over 36-72 months.
The Homeowner tax credit was $8000. I don't know of many homes one can buy in 21st century for $8000. So in order to use it, you had to take on hundreds of thousands of fresh debt over 15-30 years in a very unstable housing market. And when you add moving expensive, renovations, redecorating and purchasing furnishings, the $8k doesn't really stretch.
The cycle works like this: Until you are 18, you're debt free. Then you acquire massive amounts of debt by your 21st birthday called student loans. And that's for average pay. To get a good living, you have to get a Masters and possibly Doctorate- more student loans. There are no decent paying jobs without attending some secondary education, so you are Forced go through this debt route. You graduate- deeply in debt, and if lucky you find I decent paying entry job within 6 months. You pay your student loan over 10yrs. But you also compile more debt- living expenses put on credit cards, you need a car, you one day purchase a home when you're 30, etc.. And in a perfect world, you fully pay off your home in 30 years meaning that finally at 60, in a perfect world, you're debt-free- You spent half your life working for and paying into the system.
So if you wonder why doesn't government ever enact 'trickle Up' economic policies that help working people and the poor have a better life, now you know... the US economy could not survive without you and your debt.
Posted by Susquehanna at Tuesday, February 08, 2011