Comments for A nation of children, drowning in debt

A nation of children, drowning in debt

2009-01-28T17:41:30Z

I went to a local Best Buy to get a digital camcorder as a present last week, and saw something truly horrifying.

Two camcorders were on display next to one another: one for about $1,100, and the other for $244. Directly under the price tag for the more expensive camcorder was a financing offer: $32 per month for 48 months. Who would take that deal?

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The implicit interest rate is about 12% APR. Not many people get that rate of return on savings, CDs or 401K investments right now, or at any time in the near future. So presumably no even marginally rational person would take this financing offer if he or she had the cash to spare. So we're talking about someone fairly close to living paycheck-to-paycheck. Further, I assume that this hypothetical person does not have other conveniently available methods of borrowing against equity, since this would almost certainly be much cheaper money. So not merely someone currently cash constrained, then; someone with very limited savings of any kind.

Think of the commitment that this person would make: $32 per month out of take-home pay, every month, for calendar years 2009, 2010, 2011 and 2012. Is any non-government employee you know highly confident that he or she won't face a layoff or other reduction in income over the next four years? What would this hypothetical buyer do if that happened? As of now, they have almost no savings or equity to hollow out.

A consumer digital camcorder is a want, not a need. The incremental benefit of the very expensive camcorder vs. the $244 model is a luxury by any definition. Who would agree to finance such a purchase in January, 2009? A child.

This morning while getting ready for work I heard an interview on NPR with a very nice-sounding woman who has just lost her job. Poignantly, she closed the door so that her young child would not hear her when she told the interviewer that she will probably lose her house. I feel terrible for this person, and worse for her child. But did it never occur to her when she was deciding what size mortgage she could handle, or whether to buy vs. rent, that she might be in this situation?

American consumers are awash in debt, drowning in it. This is the fundamental issue with the stimulus proposal. We're trying to borrow our way out of debt. Unfortunately, we need a recession. That is, consumption must decline because for some time we have been consuming more than we produce or have reasonable prospects of producing. Monetary policy has been used to inflate a series of bubbles to avoid the consequences of excess debt, and the more we try to hold it off, the worse it's going to be. Bourbon works as a hangover cure, but only for a while.

It's theoretically possible for an intelligently-designed stimulus action to help smooth this landing a bit, but we can't avoid a painful adjustment. Americans are going to live in smaller houses, drive older cars, vacation nearer to home and have less impressive digital camcorders than they expect.

Surely, though, this is already happening, and the American consumer is starting to de-leverage? Yes, to a degree. I asked the salesperson at Best Buy if anybody really was taking this kind of financing offer this year. His reply: "Not much. Mostly they take the plan with zero interest for the first 18 months".

Comment from chemjeff on 2009-01-28

2009-01-28T18:19:44Z

YES. This article is spot-on. It should be mandatory reading for everyone.

Comment from Dr. Manhattan on 2009-01-28

2009-01-28T19:32:48Z

I also bought a camcorder last week; either great minds think alike or we were getting post-hypnotic suggestions from the editors of this site.
I love your punchline. But I'm pretty sure that the answer to your question about the woman who was interviewed on NPR is "no." Far too few people thought in those terms, which is a major reason we're in this predicament now; the most we can hope for is that the current recession will lead more people to do so in the future.

Comment from JB123 on 2009-01-28

2009-01-29T02:05:46Z

Why should people think that way? All these irresponsible people are being rewarded.

1. People bought houses they couldn't afford and are now getting bailouts. Instead of giving money to irresponsible home purchasers, we should give money to responsible renters.

2. Just look at the Democrats. They were the main driver behind the current problems by encouraging institutions like Fannie Mae and Freddi Mac to issues mortgages to people who couldn't afford them. Somehow their buddies in the MSM have managed to convince people that these same Democrats should be rewarded for their irresponsible behavior.

When you have incentives that encourage irresponsible behavior, expect more of it.

Comment from matoko_chan on 2009-01-29

2009-01-29T16:54:49Z

Right again, Riddick.
This is the same exact recession that we should have had on september 12.....but your pal GW and Alan Greenspan pushed it out to today by colluding to artificially depress interest rates so 'Mericans could use their homes as ATMs to "go shopping".
Alas, the fed is at what.....1/2 %??????
That dog wont hunt now.
I don't think pushing the recession bubble out any more is a good idea, either.
But I'd like to see you own the origins.

Comment from Cherie Beck on 2009-01-29

2009-01-29T17:47:22Z

Here's a link to a presentation given by Dr. David Martin speaking more truth about the financial crisis. He explicitly states that first and foremost our solutions won't work because... no one will tell the truth about the problem. The truth about our problems is just as this article points out, we don't just have housing bubble, we don't just have corruption and mismanagement on Wall Street (which we do...in fact David directly points out that Wall Street isn't about business performance anymore, it's about gambling with stocks--like taking your retirement fund to Vegas)...the truth about our problems that no one- not even Mr. Obama, will tell is that we also have a consumer credit and spending crisis.

The lecture is worth listening through to the end, for Dr. Martin points toward the solution - and that is we are being invited into something new...all of us, and the way we have lived our lives will have to change, radically. Change that means more than not spending, it's a new way of interacting with each other that doesn't reduce what we do to monetary currency.

http://www.arlingtoninstitute.org/springside-chats-no-2

Get ready for a ride folks, because most of us don't change without feeling a significant amount of pain. The approach to dealing with new experience, including the experience of pain, is to open to it. One way of beginning the process of opening is to tell the truth- truth not so much about the other, but about ourselves. And not only do we not want to tell the truth, we often don't want to hear it. We'd much rather spend time blaming and assigning guilt. Maybe our public discourse could start from the place of acknowledging hard truth rather than with monetary bailouts. When we finally discover there is more than enough blame to go around, and yes, I am suffering because of your actions, and you are suffering because of mine, maybe then we'll find solutions that work.

Comment from Consumatopia on 2009-01-30

2009-01-30T15:32:39Z

We're trying to borrow our way out of debt.

If your debts are written down in currency that you can print, maybe borrowing your way out of debt actually kind of makes sense. As individual Americans, tighter budgets seem inevitable. But it's not clear to me that frugality on the part of government would actually slow the rise of our debts.

Comment from WastingTime on 2009-01-30

2009-01-30T17:47:38Z

I'm old enough to have had parents whose answer was always "we don't need it, we can't afford it." And even so, I spent too much. Not nearly as much as most, but still too much. Fortunately, I got it under control a while ago and so we have no debt. Now we are spending NOTHING and I say every day "we don't need it, we can't afford it" even though there are some things we do need. But we can wait. If we don't have the CASH, we don't buy it. Although I never had a Starbucks habit, so I didn't have to break that habit. And now I feel guilty, because now we are part of the new problem - people not buying enough. Or nothing. I get no catalogs and I stay out of the stores.

But I don't think this restraint will last long for most people. I think Americans will only be able to hold back for so long, and then you will see a tsunami of consumer spending.

Comment from TheWesson on 2009-01-30

2009-01-30T21:26:32Z

Don't worry about the government borrowing to stimulate ourselves out of a recession. The 'out of a recession' part isn't going to happen anytime soon.

The point of the stimulus package is to turn a very hard very nasty crash into a slower more controlled crash.

Yes, we'll end up with a deficit we'll have to deal with, but hopefully we can avoid roaming crowds of angry unemployed.

Did you listen to Obama's inaugural? Why exactly is he comparing these times to Valley Forge, do you think? Because of a teeny weeny recession we'll spend our way out of?

No one in Washington wants to SAY G--- D--- but believe me that's what they're all thinking.

Multiple trillions of fake asset wealth, effectively borrowed from the future, doesn't just disappear without a lot of pain.

Comment from Conga1 on 2009-01-31

2009-01-31T10:37:09Z

The Atlantic article is spot-on, as chemjeff mentioned.
Cherie--A profound thank you for the Arlington Institute link. Dr. Martin's presentation was fantastic.
The information he presented should be required reading for all, including, but not limited to, academics, all government officials, and the general public.