Spending our way to disaster

Spending our way to disaster

The consumer debt bubble in the United States could make the stock bubble seem like nothing.
October 3, 2003: 10:32 AM EDT
By Justin Lahart, CNN/Money Senior Writer


NEW YORK (CNN/Money) - The American consumer has become deeply addicted to spending, running up ever higher levels of debt in order to live in a fashion that is beyond his means. And the world has become equally addicted to the consumer continuing to burn through cash.
It's a dangerous situation -- potentially a bubble that dwarfs even the U.S. asset bubble that burst in 2000 -- and it will be a challenge for policy-makers to keep it from ending badly.
The perseverance of consumer spending over the past several years is credited with keeping the economy afloat, but it didn't come without consequence. In order to keep on living in the manner they became accustomed to during the boom years, Americans went deeply into hock.
"If there's a bubble, it's in this four-letter word: Debt," said Merrill Lynch chief North American economist Dave Rosenberg. "The U.S. economy is just awash in it."
Indeed, consumer credit and mortgage debt are both a higher percentage of disposable income now than they've ever been before. Nor do these rises in debt levels appear justified by the rise in the value of people's homes -- household debt as a percentage of household assets (what you owe versus what you're worth) has also never been so high, according to the Federal Reserve.
How did this come to pass? We live in an economy that has become deeply dependent on the American consumer for growth. U.S. consumer spending accounts for around 70 percent of U.S. gross domestic product. So nobody wants to see the consumer falter, and they have been doing their darndest to make sure that doesn't happen.
The Federal Reserve has cut rates like never before, allowing mortgage rates to come down this year to their lowest recorded levels. Car companies have offered zero percent financing for two years now, and they've recently begun offering it on 2004 vehicles.
But rather than using such rate reductions as an opportunity to save money, consumers have, as a whole, used them as an opportunity to spend more.
"We're a what's-my-monthly-payment nation," said Northern Trust chief U.S. economist Paul Kasriel. "The idea is to have my monthly payments as high as I can take. If you cut interest rates, I'll get a bigger car."
 
Use your home equity loan to buy this $10,000 mermaid suit!
Financial companies have got into the act, too, offering people ever-more efficient ways of running up debt. Hardly does a week go by without a new credit card offer coming in the mail.
Or consider credit cards like Wells Fargo's NowLine Visa Platinum, which allows you easy access to a home equity line of credit. You can use it, says Wells in its online promotion, to help pay "for everyday expenses, like gas, groceries, clothes, etc."

Between the national deficit, the states financial delimma and an ecomony based on debt to keep it funtioning [consumer spending]. Where are we heading and what will happen when the bubble bursts as it almost surely must?


Continued at:
http://www.cnn.com/money/2003/10/02/markets/consumerbubble/index.htm?cnn=yes