Fair use, for educational purposes:

http://www.mercurycenter.com/svtech/news/indepth/docs/debt09032000.htm

Americans' debts rising as quickly as their incomes

BY JENNIFER BJORHUS Mercury News

DESPITE pockets of wealth in places such as Silicon Valley and Manhattan, rising debts are eroding income gains for many American families, according to a study scheduled for release today.

``The State of Working America,'' a report published every other year by the Economic Policy Institute in Washington, D.C., shows that American families may be earning more, but they're shelling it out just as fast.

In fact, in the 1990s, the total value of all outstanding household debt reached unprecedented highs in the United States last year, for the first time exceeding 100 percent of the total disposable income of all households.

``As far as the wealth of typical households is concerned, the real story of the 1990s was not the stock market boom, but the debt explosion,'' the authors conclude.

This year's sobering 454-page book pokes several holes in the hype about the so-called New Economy. Unemployment may be low, the authors argue, but income inequality between the wealthy and poor and within companies continues to grow, families are working more hours and more than half of all American families have no meaningful stake in the stock market.

Middle-income American families shouldered the lion's share of the growth in debt through the 1990s, responsible for about 40 percent of the growth. That same group captured only 3 percent of the growth in stock market holdings.

In addition, the study shows households spend about 13.4 percent of their disposable income making their minimum payments on mortgages and consumer debt -- exactly the same figure as in 1989, when interest rates were higher and the total amount of debt carried was lower.

Debt matters because consumer spending -- our shopping for all those PCs, pizzas, Fords and jeans -- is the main engine of the U.S. economy. There are those economists who argue that country's current economic expansion is, in fact, being driven by a massive boom in lending to families and businesses.

The problem with debt is that it can't grow faster than income indefinitely.

``The financial boom we're living in is partly financed by debt and so when that debt comes due or unemployment starts to rise again, that bubble could burst and could make the downturn worse than it otherwise could have been,'' said economist John Schmitt, one of the report's authors.

Although it's not noted in the study, households in Santa Clara County last year had the highest average outstanding debt in the nation at $96,643.37, according to data supplied by Claritas, a San Diego-based market research firm. Large mortgages account for much of the region's No. 1 standing. Residents here are better able to handle the debt than elsewhere, however, because of high incomes.

Moreover, a newly released study from the California Budget Project entitled ``Falling Behind: California Workers and the New Economy,'' confirms deep fault lines in the emerging economy:

Wealth in the Golden State remains very unequally distributed, with many rural counties showing double-digit unemployment rates.

California's poverty rate was higher in 1998 than a decade before.

After adjusting for inflation, the median hourly wage dropped nearly 7 percent between 1989 and 1999.

The occupation forecast to post the largest job growth in California is retail salesclerk, a job that pays about $16,390 a year. Such data hint at some of the causes of high debt levels in the United States, said Robert Manning, author of the forthcoming book ``Credit Card Nation: The Social Consequences of America's Addiction to Credit.'' He argues that more and more people are working part-time and temporary jobs, using credit to fill the gaps.

Not hard to come by

Other factors have driven the boom, too. Credit has simply been easier and easier to get. Low interest rates in the 1990s made borrowing even more attractive. Consumers have demanded more too as cultural attitudes against taking on debt have relaxed.

Other economists argue the single biggest agent in the current credit spiral is the stock market boom. Instead of cashing in their stock and having to pay capital gains taxes, stockholders borrow against it.

It's not just consumers who are borrowing at unprecedented levels. Sky-high levels of corporate debt, too, are raising economists' hairs.

In the early to mid-1990s outstanding corporate debt was growing at an average annual rate of about 6 percent. Now it's topping 10 percent. British economist Wynne Godley of the Jerome Levy Economics Institute in New York recently noted that corporate debt has now reached 74 percent of corporate gross domestic product, just above the previous peak in 1990.

Companies are borrowing money, by issuing bonds and by other means, to invest in new technology, acquire other companies and buy back stock, boosting share prices, analysts report. Although rocketing corporate debt is less an issue in Silicon Valley, where most companies raise cash by issuing stock, many of the big borrowers are big buyers of Silicon Valley technology.

``What's really scary about this next recession is you're looking at people that are already in debt,'' says Manning. He believes that the massive expansion of credit will have a profound impact on small businesses and recent college graduates -- groups that have been targets for loans -- as well as the elderly who have fewer social support services and rely on credit to finance medical care, food and rent.

When the U.S. economy will turn is the key. Godley calls the question ``maddening.''

Lessons from the British

Godley was on a panel of forecasters known as the ``six wise men'' who advised the United Kingdom's Treasury while John Major was prime minister. Like the British economic expansion in the 1980s, the current U.S. expansion is being fueled by a massive credit boom, he argues. The British expansion ended in the 1990-91 recession. When pressed, Godley said that if he had to guess, he'd say the United States will have a not dissimilar landing within two years. But it's only a guess, he said.

``You can see an unsustainable process,'' Godley says. ``You cannot say when it's going to turn. Just as you see a bridge being built on a faulty foundation. This is literally unpredictable.''

-- Deb M. (vmcclell@columbus.rr.com), September 03, 2000

Answers

It is midnight. The blackbirds were flipping through the paper and found out their home was on the sheriff's sale list.

-- FutureShockj (gray@matter.think), September 03, 2000.

"This year's sobering 454-page book pokes several holes in the hype about the so-called New Economy. Unemployment may be low, the authors argue, but income inequality between the wealthy and poor and within companies continues to grow,..."

All this money being spent on Pizzas and movies have to make somebody rich. And the doctors too, because Fat John and Jane Doe have diabetes at unprecedented level from all those take out pizzas.

"...families are working more hours..."

Wait, didn't the article say several paragraphs later that although unemployement is low it's filled by part-time jobs and credit is used to fill the gap? Does that mean John Doe works 24 hours a week and pays the rest of his bills with credit cards, or John Doe works 50 hours a week at 3 PT jobs and buys all those pizzas on credit?

"....and more than half of all American families have no meaningful stake in the stock market."

Was the percentage of families holding stocks higher 20 years ago? Either you eat your money, or you invest it. Or, gamble it at casinos or invest it. Or, spend it at pricy amusement parks and hotels, or invest it. Or, ...

Average Joe and Jane are squandering their economic opportunity, and who's to blame?

-- (fat@nd.happy.in.debt), September 03, 2000.

Deb M: Do you like to mudwrestle?

-- King of Spain (madrid@aol.cum), September 03, 2000.

Deb,

Or does Jell-o rasslin' seem just a little bit more fun : )

-- capnfun (capnfun1@excite.com), September 03, 2000.

Kos,

Actually, I'm kinda a mazola-oil gal... The only mudwrestling I do is over arrowheads I find in farmfields - strictly business.

Capn,

Jello, hmmm. Has posibilities. :-)

-- Deb M. (vmcclell@columbus.rr.com), September 03, 2000.

The status of sustainability can change, that is, what was unsustainable may become sustainable because of a change in circumstances. I don't see any change in circumstance that would allow the current debt load to become sustainable.

Cheers,

-- thinkstwice (thinkstwice@earthlink.com), September 03, 2000.

But Mr. Gore was on television telling us how good things are, and how things have never been better. You know that Don't Worry - Be Happy Stuff.

-- BO (BO@GRITZ.LOST), September 04, 2000.

The pyramiding of questionable or bad debt is what usually underlies the really big shakeouts in our economy. I was worried about this last year. I still see it as the number one threat to the "good times". But I've put our finances in as strong a defensive position as makes sense, while the party is still going on - IOW, we haven't gone to total liquidity in cash.

So, it made sense to stop worrying, since at this point, worry can't precipitate any useful actions I haven't already taken. What happens happens. I can't steer it.

-- Brian McLaughlin (brianm@ims.com), September 04, 2000.

Brian, you said: "The pyramiding of questionable or bad debt is what usually underlies the really big shakeouts in our economy."

I couldn't agree more. It's ironic that the same questionabl debt is also whats keeps the "good times" going. One of the things that concerns me most about the current situation is how big the shakeout will be, given that most types of debt are at record levels as a percentage of GDP. But, with so much market intervention it could be a long time before things start to unwind. Oh well, the bigger they are...

Cheers,

-- thinkstwice (thinkstwice@earthlink.com), September 04, 2000.

"But Mr. Gore was on television telling us how good things are, and how things have never been better. You know that Don't Worry - Be Happy Stuff."

Well, things ARE good, ain't they? So why worry about what COULD happen (that's a job for the economists and weather men) when you can just relax and live on?

I mean, c'mon. We're already used to recessions before 1990(and some old folks, depression.) Why not enjoy the good times now, worry free, and let the cycles do their things? A recession under Bush or Gore, what's the difference?

-- (smarty@wannabe.one), September 05, 2000.

Smarty,

I sure hope that reply was made in sarcasm! Perhaps things are going well for you now, but for others, especially the elderly and young struggling families, things aren't. I personally know of four other State employees (who make darn good wages) who are working 2nd jobs in order to make ends meet. For them, life isn't so easy...

Prepare for what you can change, be mindful of what you cannot do, for that may change in the future.

-- Deb M. (vmcclell@columbus.rr.com), September 05, 2000.