Indebted Nation: A Problem Still Growing!

Mortgage crisis, declining home values, loss of jobs, high commodity prices and cultural confusion have set upon the American population like a dark cloud. People are wondering "Am I next?" as they see their comrades walked out of the door in another attempt to cut costs. With little savings, no assets in their home and a high profile of debt such people are often only a paycheck away from poverty.

There are over a billion credit cards in the U.S. which means that every American has at least three per man, woman and child (Whitehead, 2008). These credit card debts have tripled since 1989 causing people to have a thin margin of error on paying these debts. When we add rising inflation, the slow growth in pay/salary, as well as increasing consumer costs one must wonder how we made it this far.

Houses have lost values for the past year averaging around 16% per year (Solberg, 2008). Since most consumers use their houses like "revolving credit cards" only a financially solid few have enough capital in their houses to sell them for a price they can pay off their debts with. Therefore, selling your house in a buyer's market isn't likely to make much of a difference to consumer's financial situations.

Consumers might also take notice of the rising price of oil and consumer goods. A 5% increase over the last year in consumer prices as well as rising transportation costs are putting pressure on household incomes (Yip, 2008). People still have to make it to work if they plan on feeding their families. Therefore, these additional costs further cut back on families' discretionary incomes.

With the rising phenomenon of credit cards, decrease in American Families most important asset and rising costs there is little room for anyone to readjust their budgets. This tightening of family finances is likely to create additional problems in the business world with a slow down of sales. This can translate into additional lay-offs and further decrease in consumer spending. The American populace must learn how to decrease debt and retain more disposable income for spending.

Long-term Implications: Cash is "King"

There are long term implications to a nation drowning in debt that many politicians can't see. In the times of yesteryear debt was seen as something to be avoided and as a sign that a person couldn't cover their expenses or purchases. Highly educated and high risk financial consultants have taught people that debt is a good thing for most families. Yet, they fail to grasp the macro problems with this mindset.

The more a nation goes into debt the less money it has to weather the ups and downs of the economy. Cash is "king" that can smooth out most financial swings. For example, when the economy is good people should be saving cash and when the economy is bad people should be spending their cash. This save and spend cycle can minimize inflation risks when the economy is speeding and decrease a risk of recession when the economy is slowing.

It might also be beneficial to look at national security. The Iraq War is costing trillions of dollars in taxpayer money and debt. If the U.S. goes to war with Iran or enters a major war with another nation it may not have the cash reserves or the ability to borrow without deflating the credit worthiness of its dollar further. Further deflating the dollar will serve little benefit to the American population beyond what is needed to raise exports.

Where money and debt is concerned the nation should focus on keeping debt as low as possible. The average Chinese citizen saves a lot more money then in the U.S. despite their lower income and standard of living. This savings mind-set means that Chinese growth can continue even if the savings are used up because of the untapped credit market. Americans, on the other hand, have already tapped their available credit resources and there is no where else to go.

Solberg, R. (2008). False signs of the end. Retrieved August 5th, 2008 from http://www.atimes.com

Whitehead, B. (2008). A nation in debt. American Interest, 3 (6).

Yip, P. (2008). Consumer Price Indent may not reflect Your Family's Reality. Retrieved August 4th, 2008 from http://www.dallasnews.com