Yes...but!

August 25 2008

Home > Columns >Yes...But! Year 8-42

After finishing my formal education, and doing my obligatory 18 months military duty, I came to Canada in 1951 as a farmhand. Within a year I had 4 different jobs: two months on the farm, one day in a factory, 8 months in a flour-and-feed mill and 3 months as a bill collector for Household Finance. I finally settled down as a life insurance agent, where I did well. I married my fiancée in 1953. She had come over in 1952 as a domestic, even though she had a pharmacy degree.

The $300 savings we had were spent on a fold-away bed, a simple table and 4 wooden chairs at $2.00 a piece, a hot plate, pans, cutlery and some dishes. We had rented a basement apartment for $25.00 per month. No debt. Oh yes, I needed a car for selling insurance, and had earlier borrowed $700 – co-signed by another immigrant - paid off that loan in a year, and bought a new car - $2,000 - a year later for cash.

By 1963 I had saved $5,000, had an 1800 square feet house built, got the maximum CHMC mortgage of $15,000 and that was the only other loan I ever had.

My motto always has been: no debts, no worries. Old-fashioned, I am sure.

Now debt is everywhere. Debt will do the USA in. Take credit card balances. I scrupulously pay my charges each month avoiding the 20 percent penalty. In the USA, between 1989 and 2001, credit card debt almost tripled, from $238 billion to $692 billion. By fall of 2007, the amount of revolving consumer credit had reached $937.5 billion, and must be well over a trillion dollars (one million times one million) now.

Up until last year most people were able to manage higher credit card debt without undue distress, but in today’s more troubled times, families can’t even come up with the minimum: nearly half of all credit card holders have missed payments.

It used to be that growing home equity miraculously furnished funds to pay off 20 percent credit balances, but now, with collapsing real estate values and tighter credit, that source has gone the way of cheap fuel. So people bank on another miracle: they buy lottery tickets. The lower the income, the more chances they take: U.S. households with incomes under $12,400 use 5 percent of their gross income for that purpose. Suppose that a low-income household, now expending $645 on the lotteries would save and invest that same $645 every year for forty years, it could have a tidy sum $87,191 upon retirement. Of course, the same applies to smoking. I know of a couple who spent $600 per month on cigarettes, or $7,000 per year. Imagine what that amount would do in 40 years! They’d be millionaires!

The US economy is built on people buying things they don’t need with money they don’t have. Trillions of dollars were extracted from rising property values, as naïve homeowners took out ever larger mortgages.

Now plastic is the last card the consumer can play, as housing equity is gone. Billions more were obtained through ever higher credit limits – the 300 million Americans possess one billion credit cards, for an average of 10 cards per household – causing the economy to boom. Now the total of the outstanding financial obligations for government, corporations and individuals boggles the imagination: it’s more than 70 trillion. Combine this with the quality of jobs having dropped from well-paying factory positions to lowly service employment, while the cost of living has jumped- John Williams, owner of Shadow Government Statistics, has calculated that the real inflation rate is 13.4 percent- and I don’t need tea leaves to predict a deeply deteriorating economy.

With the last resort for cash gone, for the consumer there is only one option left: live within one’s means and save for a stormy day. Thrift will give the economy even more headaches, because spending cut-backs will boomerang through the American economy like a Number Five Hurricane, causing even more job losses, deflating home prices even more.

Out of necessity belt tightening has become the new Olympic sport. A recent survey found that during the second quarter of this year, 72% of U.S. households cut back on driving and 60% spent less on food. Nearly two-thirds were buying fewer clothing (64%), and more than one in four (27%) reduced medical expenses. The last item bodes even more ill for that nation: the stress of less income, of threatening job loss, of high debts, is a perfect prescription for contracting hypertension, heart attacks, strokes, even cancer.

More than 400 years ago Shakespeare wrote: “Neither a borrower nor a lender be”. Today this truth is more relevant than ever.