All Things Financial got hold of an MSNBC article entitled
What if we all paid off our credit cards?
The scenario is that everyone pays off their outstanding credit card balances all at once, and doesn't take on new credit card debt. A saving tsunami, if you will.
OK, now that you've stopped laughing, what would happen? A huge loss of purchasing power because people aren't borrowing, and oodles of workers out on the street because they don't have as many people to produce for. If a healthy economy is a machine, credit is the grease. No grease, and your machine grinds to a halt.
That said, though, we have so much grease that we're sliding out of control — due mainly to the profligacy of Americans as a whole, and lots of indiscriminate, high-risk extensions of credit by lending institutions.
But are we in trouble? John Schoen, author of the MSNBC article, doesn't think so:
“To many observers, the current rate of American savings seems dangerously low – and debt levels dangerously high. But we’ve heard the same warning several times in the past few decades. And the U.S. consumer, and the economy, seem to find a way to keep on going.”
I disagree. We're not in the same financial shape we were 20 or 30 years ago. Real American wages have almost stood still over the past two decades. Our car companies are in trouble, and they look instead like lenders that produce cars on the side. Rather than producing more than we consume, we now consume hundreds of billions of dollars more of other countries' products than they consume of ours. We hardly make things anymore. And foreign countries own more of us every day, and own trillions of US dollars in treasury obligations their banks. They're certainly getting sick of watching their dollars lose value every year, and probably are thinking more and more that we're losing our ability to pay the treasury obligations. When will they sell? Who knows — but when they do, everything will become more expensive, including (especially) gasoline. (Oh — did I mention that the world's oil production will hit a maximum within the next few years?) Bond prices will fall, pushing interest rates up. Borrowing gets more expensive.
How will we keep on going? How will we keep our debt levels up and how will we continue to spend beyond our means?
A saving tsunami may make the economy a lot less vibrant, but it seems better than an economy that's vibrantized itself into a hole it can't climb out of. Then there will be little choice but to save — just like in the 1930s.
What do you think? Is mass saving, and the resulting depression, really all that bad? Or are we all right, and just need to lighten up and charge a couple of fancy dinners? Or somewhere in between?
I am new to personal finance and I am just learning how debt, credit, interest rates and the whole 9 work. But I don't see why it would be so terrible if everyone was out of cc debt tomorrow. I'm sure it would be bad for a short time, but the market would correct itself. And I think it would be a whole lot better to be unemployed with NO DEBT and some savings, than unemployed with bills and loans you no longer have income to cover. I for one would be much happier to spend if I was out of debt and had some investments working for my future.
I agree with Debt Hater, there might be some short-term pain for the economy, but overall it (no debt) would be a plus. Of course, some segments would suffer (credit card companies) more than others. But maybe their time, like those buggy whip makers of legend, is coming to an end.
I'm with you here, at least, I think I am, if I'm reading you right… 😉
Yes, the economy, as a whole anyway, does need debt to function efficiently. But I'm afraid we've likely overextended ourselves – IMO in a massive way – as individuals as well as a nation, and just have entirely too much personal and governmental debt to be sustainable.
I'm not sure what will trigger the wake up call that certainly will come, but when it does I'm afraid it will be very painful to many people.
I'm happy I've somehow 'seen the light', and am really working on getting our family back into a bit more stable shape. But even when I do get that accomplished, I unfortunately trust my gov't very little not to punish those of us who have planned to make up for those who haven't.
Great discussion! Thanks for your comments!
Interest rates are on the rise. I heard on NPR tonight that 10-year treasury APYs were challenging two-year highs. Longer payoff times, and rising ARMs, will begin to strap people.
And Sean, I tend to agree with you that the savers will end up footing the bill.
Additionally, I admire people who work to pay off credit card debt and tell others about it. I've seen more than one article on MSN Money about which bills NOT to pay or how paying down your debt can HURT your credit score. There are a lot of incentives to stay in debt, and it's good to see people getting out of it.