American workers are currently grappling with a troubling reality. Their debts are escalating, while their earnings remain stagnant.
This situation arises from numerous factors, and outlining every single one would require an extensive body of work. However, at its core, this predicament is a result of years of technocratic intervention that have eroded the foundations of a self-regulating and efficient economy.
As of 2017, the financial system and the economy underpinning it are teetering on the edge of collapse. Poorly conceived fiscal and monetary policies have exacerbated the situation, leading to a deteriorating financial landscape that primarily benefits a select political elite and their associates, while leaving the rest to struggle.
Take consumer spending as an example. This is the main engine driving the U.S. economy, yet it relies heavily on substantial credit. At present, American consumers carry a staggering $1 trillion in revolving credit, even though their incomes fall far short of what is necessary to manage these debts, much less repay them.
The essential truth is that debt and credit are two sides of the same coin. The growing divide between mounting debt and stagnant wages cannot persist indefinitely, though it has far exceeded what most would deem sustainable.
Debt Slaves
The financial services industry excels at persuading individuals to plunge headfirst into debt. The entire fiat-based financial system relies on an unending cycle of debt issuance. A mere contraction of credit—as witnessed in late 2008—can dismantle the entire structure of debt repayment.
On a personal level, there is a limit to how many credit cards can be maxed out before the entire scheme collapses. Wolf Richter of Wolf Street recently shed light on the connection between the economy and consumer debt:
“The U.S. economy thrives on credit. When Americans chain themselves to debt, the economy keeps running. Remove that, and the paltry growth we see—nearly nonexistent in the first quarter—will evaporate.”
“In a recent study by Northwestern Mutual, it was found that 45 percent of indebted Americans allocate ‘up to half of their monthly income toward debt repayment.’ These are the true debt slaves.”
“Aside from mortgages, Americans carry an average debt of $37,000, with 47 percent holding $25,000 or more, and over 10 percent owing $100,000 or more.”
“While many believe they will escape debt before their lives conclude, 14 percent fear they will remain indebted ‘for the rest of their lives.’”
The Coming Debt Reckoning
Individuals facing high levels of debt are engaging in a precarious gamble. A single job loss or health crisis could be devastating. Even in the absence of such events, the compounding interest on their considerable debts continues to accumulate, potentially reaching a breaking point.
This process may initially manifest slowly, but it can swiftly escalate. A notable conversation from Ernest Hemingway’s 1926 novel, The Sun Also Rises, encapsulates this phenomenon of gradual bankruptcy:
“How did you go bankrupt?” Bill queried.
“Two ways,” Mike replied. “Gradually and then suddenly.”
It seems that for many Americans, the gradual slide into bankruptcy is increasingly turning into a sudden crisis. While accumulating more debt may appear to temporarily alleviate some problems, this strategy often leads straight to insolvency.
The first-quarter GDP report revealed a mere annualized growth rate of 0.7 percent, with personal consumption rising only 0.3 percent.
Consumers are feeling the pinch. Some are trying to cut back, while others are at their breaking point. Is it any wonder that retailers are closing stores at unprecedented rates?
Clearly, the repercussions of reduced consumer spending will ripple through various sectors, including commercial real estate, manufacturing, shipping, transportation, and energy. We face the reality of a supply glut, primarily driven by excessive debt.
We anticipate an approaching reckoning regarding debt, one that doesn’t even take into account the vast sums of government debt. Now is the opportune moment to establish a solid financial foundation.
Sincerely,
MN Gordon
for Economic Prism
