Understand American Debt Nightmare

Monday, March 7, 2011, PM | Leave Comment

Doing research for my blog, I came across an article on MSNBC dot Com that was updated 10/14/2008. It’s more than two years old but in some respect it holds true even today. The title is “American debt nightmare ends easy credit era.” Experts say crisis could spark shift away from maxing out credit cards.

The article further states that “Experts say that even when the current credit crunch eases, the nation may finally have maxed out its reliance on borrowed cash. Today’s crisis is a warning sign, they say, that consumers could be facing long-term adjustments in the way they finance their everyday lives.”

Why not start today and stop the never-ending spending spree by the consumers as well as by the government. That includes such heavy bonuses to the C-level management of public companies.

“U.S. consumers will find it much harder to get a credit card, and to carry large balances. Late fees will rise and lines of credit will be reined in. After years of buying homes with interest-only loans, or loans that allowed people to borrow more than the value of the home, substantial payments and downpayments will be required. Interest rates are also likely to rise.”

Americans are living beyond their means. A wise man once said: “Stretch your legs according to the length of your sheet.”

Look at this chart. To me, it’s mind boggling. The average debt of American families is over $79,000.

I come from a poor family, an immigrant

I was raised in a financially conservative family. I was 23 when I came to the States. Well! I guess we had to be conservative. We did not have any means of living by credit. Everything was bought with cash. If we couldn’t afford it with cash,  we just didn’t buy it. Period.

When I compare myself with my kids who were born in the States, the way they spend money, is so way out of my league. They tell me “Money is for spending.” But one thing I appreciate is that so many credit card-issuing banks send them application forms, they just trash them. Even if they spend all their money when they get paychecks, at least at the end of the day, they will not be in debt. I hope they continue that and don’t borrow like there is no tomorrow.

“The expansion of credit has, in many ways, been a good thing. It has allowed many more people to buy homes. At a time when household incomes have stagnated, borrowing has made it possible for many people to afford purchases and cover short-term expenses they might otherwise have had to delay or abandon.”

But all that borrowing came at a heavy cost. Major points from the article:

  • Americans are more reliant on debt then ever before. “We are going to have to cut back,” said Dean Baker of the Center for Economic and Policy Research, a Washington, D.C. thinktank. “We’ve really been living beyond our means.”
  • Americans, borrowing to cover ordinary living expenses, have all but abandoned saving. The U.S. personal saving rate dropped to well below 1 percent in late 2007 and early this year, according to figures from the federal Bureau of Economic Analysis.
  • Now, many families spend virtually all of their incomes covering living expenses, and even that is not enough.
  • Before the housing bubbled popped, many consumers were pulling money out of their houses to pay for expenditures – from boats to big-screen TVs – well beyond ordinary living expenses.

In a Nutshell
Let’s hope we have learned something during this financial crisis. Just curb your spending. Looks like for the foreseeable future, we have no choice but to live entirely within our means. Just don’t compare yourself with the Jones’. You will, then, be alright.

Don’t put your head in the sand. We are humans, not ostriches. We have the ability to think and, mind you, with our head of all the places in our body. That ought to be considered a gift and be thankful for it and not waste it.

I think it was Paul Valery who once said: “The trouble with our times is that the future is not what it used to be.”  It definitely is not.

P.S. If you have time, watch this video. What bailout? Bonuses still coming.

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