American Debt Reaching New Highs and Americans Continue to Use More Credit

Sixty some odd years ago, keeping your head above water meant saving a dollar. Today, it means borrowing a dollar… or two.

With each passing day, American debt levels reach new highs, the United States adds $2.43 billion to their record-high national debt, and the dollar continues to fall in value, further eroding an already insufficient retirement savings…

What are most Americans doing about it?

They’re consuming even more, even if that means dipping into their savings or taking on debt they’ll never be able to repay.


Because it has to do with an economic struggle… an innate and uniquely American fear of being left behind (or, even worse, completely left out)…  It has to do with an individual’s fight for their particular piece of the proverbial American dream.

Political icons constantly remind Americans of achieving the “American Dream” and becoming an “ownership society” as if to say you can do better, achieve more and thus find happiness.

Its roots go back to the great bull market that followed World War II. That glorious economic expansion gave birth to America’s first legitimate middle class… a group of people whose last names were scribbled onto University rosters for the very first time.

Every American family could now have a house with a yard, a new Oldsmobile or even a Cadillac Coup de Ville…  The “American Dream” was reborn and recast, unfettered by a cautionary tale not even one generation old.

If you couldn’t keep up with your neighbors, then new companies such as Visa and MasterCard could help you out.

The gods orchestrating the strings of modern finance offer us a Faustian solution: the pleasure of consumption without the pain of saving. Did Mr. and Mrs. Consumer spend more money than they have in the bank? No worries, they can pay it back next month… or the month after… or maybe never.

They’ve been told to expect more for less…  They’ve been assured that it’s O.K. to spend more than you make.

This is the game that caters to a new American debt filled generation… an entitlement class of children playing children’s games… a generation weaned on the bottle of instant gratification.

It won’t be long before the notion of keeping you’re financial head above water will soon require more effort than signing one’s name on the back of yet another new credit card.

But wait a second. How did we get into this quagmire of American debt, you ask?

I would venture to guess that the distance between economic theory and economic reality in most cases is about one foot. That’s the approximate distance from your brain to your heart.

As Bill Bonner points out in his latest book Mobs, Messiahs, and Markets, “people’s convictions arise not from proofs supplied by the brain but prejudices amplified by the heart.”

Most modern economic theory remains based on the premise that man is a rational being. Anyone who’s spent more than five minutes on planet Earth knows that man is rarely a rational being. As Bonner explains: “Human beings are neither good nor bad, they’re merely subject to influence.”

The reason seems simple. People find comfort in knowing lots of other people have made the same choices… like fans routing for a sports team. Human beings naturally gravitate towards the crowd. And “crowds cannot think. They can only feel and act.”

So their behavior only seems rational in the fact that “everybody’s doing it.”

Enter Alan Greenspan, the High Priest of American debt financed consumption. For nearly two decades, the former Chairman of the Federal Reserve provided grandfatherly platitudes about the importance of saving and investing, while simultaneously pulling every monetary string imaginable to insure that Americans borrowed and consumed, or borrowed and speculated… or just borrowed for no good reason.

Under his watch, he lowered short-term interest rates to 1%, thereby stimulating an economy that required no excess stimulation. “He applied an emergency interest rates,” in the words of James Grant, “even though there was no emergency.”

So Alan Greenspan’s recent comments to 60 Minutes correspondent Lesley Stahl struck us as mildly disingenuous, or perhaps just forgetful.

Greenspan said that over the long run, the biggest problem facing the U.S. economy is “the re-emergence of inflation” and rising interest rates.

Hmm… Wasn’t he the chairman who presided over a series of financial bubbles? Wasn’t he the chairman who battled each financial bubble with emergency doses of EZ credit? And wasn’t he the Chairman, therefore, who sowed the seeds of the inflationary trend he finds so troubling, now that Ben Bernanke is in the hot seat?

Perhaps it is not Greenspan’s fault that America now finds itself as indebted as ever and in possession of greatly debased dollar bills. But neither is it NOT his fault.

Let’s take a quick survey of the current condition: Oil and food prices continue to surge… the U.S. money supply keeps stretching its legs at a 12% annual clip. Entitlement programs goad America deeper and deeper into debt. Politicians promise more to help alleviate record American debt levels.

Meanwhile, the Iraq war tab keeps churning along at a rather brisk $10 billion per month pace — or, if you prefer, $231,481 per minute. Throw in the Afghanistan situation on the running meter, and we add another $34,722 every 60 seconds of war.

The average American worker brings home $39,795 per year — or $19.13 per hour. So excluding overtime, John Q. Public must now clock six years to pay for 60 seconds. So dismiss the fact that his interest-only house payment is set to expire. Forget the fact his credit card bills bear a $15,000 balance. It’s only interest. Washington plays this way…  why can’t he?

It gets better.

Osama still lurks. President Bush presses for missile defense systems in Eastern Europe. Russia, for fear of being outmatched, lays claim to the North Pole and all its Christmas goodies, which just happen to include 10 billion tons of gas and oil deposits… not to mention the significant sources of diamonds, gold, tin, manganese, nickel, lead and platinum peacefully resting on top of the world. To punctuate its resolve, Gazprom threatens to flip the switch in Europe once again.

China, for its part, passively eases its desire to absorb American IOUs. Japan dips its toes in the waters of remilitarization. Venezuela throws its proverbial hat in the ring by ousting foreign oil, while Iran consistently defies the international community by mischievously playing with yellowcake.

Saudi Arabia, Egypt and Israel broker a multibillion-dollar American arms deal. The trade hopes to “counter” the negative influences stemming from Syria and Iran. And if geopolitical showdowns weren’t enough, the world still fears a multi-trillion-dollar international credit crunch.

Meanwhile, American infrastructure keeps crumbling. After more than 20 years of reckless, American debt financed consumption, homes are full of plasma TVS, while American roads are full of potholes. The American Society of Civil Engineers submits Ds down the U.S. infrastructure report card. Poor road conditions now cost the American taxpayer $67 billion a year, $5.6 billion a month, $186 million a day, $7.8 million an hour or $130,000 every minute.

And that’s just to patch roads and bridges. The EPA estimates that U.S. sewer system maintenance over the next 20 years will run somewhere in the ballpark of $390 billion. That’s another annual $20 billion annually, or $1.7 billion per month.

Meaning potholes and solid waste are costing roughly as much as a full-fledged war. How will John Q. Public pay for all that, we ask?

We’re not sure. But it seems to us that he will pay for it with dollars… and that’s the heart of the problem. Every imaginable rescue mission for the overly indebted American consumer, not to mention the overly indebted American government, leads to increasing quantities of dollars and credit, which can only mean one thing:

Dollar-holders beware.

Christopher Hancock
for Markets and Money

Chris Hancock
Christopher Hancock has spent the last two years doing investment research primarily focused on emerging markets, specifically China and Hong Kong. After working with Citigroup in Hong Kong on the challenges and opportunities associated with the forthcoming RBM flotation reform, Christopher left many of his friends behind and decided to return to the States to pursue a career in equity research. Christopher's desire to work for an independent firm led him to Agora Financial, where he now is the editor of Free Market Investor. Christopher travels extensively and utilizes his contacts across the globe to recommend the best international investments in the world right now for his subscribers.

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