Recipe for Financial Disaster

Thursday, December 25, 2003
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Over the last 12 months, consumers racked up a record amount of personal debt, and with it record numbers of personal bankruptcies and foreclosures. And experts on personal debt and the economy say consumers will continue to spend.

“The consumer has been the hedonist of last resort,” said Alan Levenson, chief economist for T. Rowe Price. “We expect that will continue to be the case.”

I keep harping on this because the joyheads in La La Land keep ignoring it. We are a nation of debt and debtors.

This is one of the most important pieces I’ve seen yet on the dilemma of what is driving the economy, and how people are falling into the various traps set by the Feds. Keep a populace fat and happy, and dirty deeds like the “war on terror,” the Patriot Acts, and HR 2417 become easy pickings. From The Street:

According to the Federal Reserve, Americans rang up a record $1.7 trillion in personal debt through October, with $724 billion of that in unsecured forms, such as credit-card debt.

But while debt levels continue to rise, there’s little in place fiscally to make consumers stop spending, and that will be a boon for the economy in 2003. The powerful combination of Federal Reserve cuts to short-term interest rates, widespread availability of credit and low prices on everything from new cars to clothing will keep consumers driving economic growth.

“The biggest bubble could be growing in single-family homes,” said Auxier. “More than 60% of those mortgages require two incomes. What happens if people get sick? Or housing values drop?”

Even though banks wrote off $3.9 billion in credit-card debt in the third quarter, lending is still a very profitable business, with the Federal Deposit Insurance Corp. also reporting that bank profits were up 34.8%. The reason? Banks can buy their money from the Federal Reserve at a low rate of 1.25% and mark it up to consumers at 22%. The huge profit margin ensures safety for the banks because the profits roll in as long as people keep making minimum payments.

The bolding is my emphasis. 2003 will break all records for debt, foreclosures, and bankruptcies, but the talking heads in Washington will keep reminding everyone to “spend, spend, spend, because it’s essential for the economy,” and the Sheeple will keep listening.

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