THE DEBT CULTURE OF AMERICA

Samuelson argues that the credit culture had its origin in the 1920s at the advent of installment loans for cars and appliances.  He quotes Martha Olney, who contends that “By the 1920s, it was only foolish families that didn’t buy on credit and use it while they were paying for it.”  By the mid-1920s, 60 to 70% of cars were sold on one-to two-year loans.  After World War II, credit fueled the mass market of goods and the consumer culture. 

The challenge for America’s culture of debt is that no society “can ever raise its borrowing faster than its income,” which is what, Samuelson argues, the US has been doing.  Sooner or later debt burdens become oppressive for the individual and for the culture.  How did we get into this current mess?  To soften and hopefully end the 2001 recession, the Federal Reserve launched a policy of easy credit.  From December 2001 to November 2004, it held its short-term interest rate under 2%.  The result was a real estate boom.  From 2000 to 2005, housing starts rose by one-third.  Sales of new and existing homes increased by almost 40%.  In some markets, prices more than doubled over five years.  However, the Fed believed it had gone too far and began to reign in interest rates, raising those rates from 1 to 5.25% since June 2004.  Hence, the housing market has been in a tailspin.  If this cycle ends violently, there could be a housing market crash in both prices and construction.  Obviously, the Fed desires a gradual and graceful unwinding of this sector of the economy.  At this point, that is far from certain. 

Samuelson writes that we could be witnessing the end of the credit cycle within America.  The decades-long rise of personal debt in relation to income could be over!  “It is not just that debt service—interest and principal—is at a historic high, almost 19% of disposable income.  Credit standards may have been stretched too far.  Since 1989, the share of households with debt has risen from two-thirds to three-quarters.”  For the last decade and perhaps longer, the debt culture has fueled this economy.  Is it coming to an end?  The blunt and bottom-line question is how long can people and this culture fuel everything with borrowed money?  The obvious and sensible answer is not much longer.  But this economy is built upon huge layers upon layers of debt—at all levels, individuals, corporations, small businesses and of course government.  If debt no longer fuels the American economy, what will happen?  The reality staring us in the face, now or within the next few years, is that we may soon find out! 

See Robert Samuelson, in the Washington Post (23 August 2006).